Figuring out your Customer Life Time Value

Customer Life Time ValueAs a marketer and executive there are various Key Performance Indicators (KPIs) that I tend to follow. One of these KPIs is our customer’s Life Time Value (LTV). The life time value in short is the amount of money an average customer from your chosen segment will spend in the coming years minus the dollars you spent getting that customer to your store. This KPI can help you gauge certain marketing channels, and enable you to distribute resources according to pre-determined customer segments.

But how do you figure out your customer LTV? I thought you’d never ask…

Customer LTV is a function of your Segment Size, Gross Margin, Average Order Value (AOV), Acquisition Cost and the number of orders per customer over a set amount of time.

Here is the function to consider:

LTV = [(AOV * Avg Number of Orders * Gross Margin) / (Segment Size)] – Acquisition Cost

In the example above, we have a segment size of 50,000 customers coming from a certain channel with an acquisition cost of $78.00. If we look at a 1 year span, the average customer orders 1.39 times a year with an average order size of $208.82. With a Gross Margin of 60% the LTV of this segment is $174.16. As you look at a larger time span, the number of orders per customer gets larger; therefore, the life time value grows as well. On a 5 Year span the Life Time Value of the Customer grows to $251.02.

The LTV is a very important KPI, and the time span you choose to determine LTV, depends on your business goals, your industry and the product or services you are selling. There are many ways to “skin this cat”, this is the method I find to be most quick and easy, and I use it consistently to help me determine marketing efforts and helps us segment our Top 20 VIP Customers. How do you use LTV? What time span is right for you and your industry?

Identify What Drives Your Business

Key Business Drivers for SuccessThe success of a business is dependent on a variety of circumstances. Some of those are external to the organization and are not controllable and some are internal and are under our control. However, there are usually a few internal drivers that create long term success for a business. In this case I would like to define success as the ability of a business to grow its top line and bottom line faster or much faster then the industry.

You can find many explanations and many contributing factors. However, the reality is that there are usually a few activities that make the difference between success and failure. And if these key drivers are done well and are done consistently the company sees above average success and growth.
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