Definition
Lifetime value (LTV) is a metric that measures the average revenue a customer generates during the entire course of their relationship with a brand. Factors like purchase history, frequency, average order value (AOV), and retention rate all go into calculating LTV. You calculate LTV by dividing total revenue by the total number of unique customers.
How eCommerce Marketers Use LTV
LTV is hugely beneficial to brands because it allows them to allocate resources more effectively, tailor customer engagement strategies, and bring to market products and services that resonate best with the most valuable customers—all which work together to maximize a brand’s profitability.
Because it helps identify which channels bring in repeat or high-value customers, LTV is invaluable for implementing long-term marketing strategies. After you’ve determined who are (and are not) your high-LTV customers, you can decide how to approach the following:
Budget allocation
- For high-LTV customers: Invest advertising dollars where your high-LTV customers are. For example, if these customers spend a lot of time on social media, you should invest in paid social ads and influencer partnerships to attract even more of these consumers.
- For low-LTV customers: Decrease marketing costs associated with these customers. For example, you can use cost-effective email campaigns for lower-LTV customers to continue fostering trust and keep your brand top-of-mind, but reduce or completely nix advertising dollars so you don’t continue to convert this customer segment.
Advertising performance
- For high-LTV customers: Determine which paid media channels and ad placements are generating your high-LTV customers, so you can focus advertising efforts around this data. For example, if a Meta Ads campaign that primarily uses video generates more high-LTV customers than a Google Performance Max campaign, allocate more advertising dollars and effort to Meta Ads.
- For low-LTV customers: It may not be cost-effective to advertise to consumers who have the same demographic as your low-LTV customers. Pay close attention to your LTV to CAC (customer acquisition costs) ratio to help you determine if spending ad dollars on acquiring more customers who fall within this demographic is costing your brand money, or if you can continue to acquire these consumers without falling into the red.
Retention
- For high-LTV customers: You want to keep these consumers for as long as you possibly can, so you should offer them personalized services (like dedicated customer support and early access to new product collections) to increase their loyalty and satisfaction to keep them coming back.
- For low-LTV customers: Don’t put a lot of focus or spend on retaining this segment; but, consider engaging with these customers via low-lift retention efforts (like periodic discounts and special offers) to try to boost their lifetime value.
Product satisfaction
- For high-LTV customers: Your customer LTV analysis will tell you which products resonate best with your money-making customers. So, strategize product development, product optimization, and go-to-market efforts around this data.
- For low-LTV customers: Your LTV reporting and analysis will also tell you which products are not resonating with your ideal customer profile, and which are costing your brand money. Again, strategize product management around this data to maximize your profitability.
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