What is Customer Lifetime Value (LTV)?
Customer Lifetime Value (LTV -- also referred to less commonly as CLV or CLTV) represents the total net margin a business expects to earn from a customer throughout their relationship.
This metric is crucial as it helps businesses understand the long-term value a customer brings by balancing the revenue generated against the costs of servicing the customer.
Example:
Imagine an Indian online streaming platform where customers, on average, subscribe for 2.5 years. The average annual subscription fee per customer is ₹1,000, and the annual cost of service per customer (including content, technology, and support costs) is ₹800.
The LTV is calculated as:
CLV = (Average Annual Revenue - Annual Cost of Service) × Average Customer Lifespan
= (₹1,000 - ₹800) × 2.5 = ₹500.
Significance of LTV:
Understanding LTV is crucial for making strategic decisions about customer acquisition and retention. It offers insights into the profitability of customers over time, significantly impacting budgeting, forecasting, and strategic planning.
The formula for calculating LTV is:
(Average Revenue per Customer - Cost of Service per Customer) × Average Customer Lifespan.
This calculation highlights the net value each customer contributes to the business over their lifetime. A higher LTV suggests a more valuable customer base, indicating potential for long-term business stability and growth.
Additionally, analyzing the LTV in conjunction with Customer Acquisition Cost (CAC) offers deeper insights into the efficiency of customer acquisition strategies.