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?

New Column Alert! Focusing on the top 20 percent of your customers

Focusing on the top 20 percent of your customersoverstockArt.com CEO, David Sasson, posted a new article today on Practical eCommerce titled: Focusing on the top 20 percent of your customers.

The article tries to explain how online retailers can utilize segmentation based on buying behavior to grow sales to the top 20% of their customer base.

David, off course, is talking from experience. overstockArt.com created a “Top 20” marketing initiative to cater to the Top 20 Club and try and turn more of their long tail to Top 20 shoppers.

The project is ongoing and will go through many changes and tweaks, but in general it has proven itself a resounding success:

“We are now able to hone our limited funds towards the type of people and businesses who can become part of our top 20 club.”

Read the entire article including real-time stats here:
http://www.practicalecommerce.com/columns/hand-painted-ecommerce/61022-Focusing-on-the-Top-20-Percent-of-Your-Customers