Brand reputation plays a key role in the calculation of a number of marketing indicators, one of which is LTV. Understanding a customer’s lifetime value (LTV) is essential for any company wishing to optimize its profitability and marketing strategies. At a time when competition is intensifying and acquiring new customers is becoming increasingly costly, LTV provides companies with an overview of their customers’ profitability over the long term. This metric not only makes it possible to assess the real contribution of each customer, but also to steer marketing and loyalty investments more precisely. By integrating LTV into their strategic management, companies can better manage their resources and maximize sustainable growth.

What is a customer’s lifetime value?

Lifetime value (LTV), also known as LTV, is a key performance indicator that enables companies to measure the profitability of their customers over the long term. It represents the sum of revenues generated by a customer over the course of its relationship with the company, after deducting the costs associated with acquiring and managing that customer. In other words, LTV measures a customer’s real contribution to the company’s profitability.

Why calculate lifetime value?

Calculating LTV offers several major advantages for companies. Firstly, it helps optimize marketing investments by adjusting advertising spend to the actual profitability of each customer segment. Secondly, it helps improve customer retention by focusing on maximizing LTV, which can include targeted promotional offers, better after-sales service or increased personalization of customer contacts.

What’s more, LTV enables more precise management of the break-even point. By understanding LTV, managers can better understand and manage the costs associated with acquiring new customers, in order to find the optimal balance between growth and profitability. By integrating the LTV concept into management and strategic planning, companies can optimize their resources and improve overall profitability.

How do you calculate lifetime value?

To calculate LTV, several elements need to be taken into account: the average revenue generated by each customer transaction, the frequency of customer purchases over a given period, the average number of years a customer remains loyal to the company, and the costs of customer acquisition and retention. The LTV formula can be represented as follows:

LTV = (Average revenue x Purchase frequency x Customer lifetime) – Acquisition and retention costs

Step 1: Define an analysis period tailored to your company’s specific needs

The first step is to define an analysis period adapted to the company’s specific needs. This period, which may be six months or one year, must be kept constant in subsequent calculations to ensure consistent and reliable comparisons.

Step 2: Determine the values of the elements included in the calculation

Once this basis has been established, certain essential data must be determined:

  • Customer retention rate: the proportion of customers retained over the evaluation period.

  • Average customer lifetime: the estimated period during which a customer remains active and generates revenue for a company.

  • Average purchase value: the average amount spent by a customer on a transaction.

  • Purchase frequency: the average number of transactions made by a customer over a given period.

Step 3: Calculate lifetime value

This figure represents the revenue generated by a customer over the course of their entire relationship with the company, without taking into account acquisition and loyalty costs. To refine the analysis, we recommend integrating these costs to obtain a more precise view of the real profitability of each customer. Segmenting customers according to their lifetime, average basket or frequency of purchase enables marketing strategies to be optimized, and efforts to be concentrated on the most profitable segments.

Best practices for improving lifetime value

Certain best practices can be adopted by companies to improve the LTV of their customers:

Reduce acquisition costs

A first approach is to optimize marketing and advertising expenditure, in order to reduce the cost of acquiring each new customer. This can be achieved by better targeting campaigns, using more cost-effective techniques (such as digital marketing or word-of-mouth), or improving conversion rates by exploiting customer data.

Maximizing perceived customer value

To increase the revenue generated by each customer, it is essential to work on the quality of the offer and customer relations. In particular, companies can offer complementary products and services, personalize their communications or set up an attractive loyalty program.

Improve customer satisfaction and loyalty

Building loyalty among existing customers by fostering their satisfaction is another important action lever for companies. It’s not just a question of proposing promotional offers, but also of listening to customers’ needs and requests, dealing promptly with their complaints and creating a climate of trust. And this is where e-reputation, NPS (Net Promoter Score) and google ratings and reviews impact LTV!

The limits of lifetime value as a single indicator

While LTV is undeniably a key element in the strategic management of a company, its limitations must also be taken into account:

Precise calculations and data

Calculating LTV requires precise, reliable data, which can pose problems for companies with limited customer history or underdeveloped information systems.

Qualitative aspects

LTV does not take into account certain qualitative aspects, such as the impact of the brand or the influence of customers on their environment, which can play a major role in a company’s long-term performance.

Customer diversity

All customers are not equal, and the average LTV only gives an overall view of customer profitability. It is therefore important to complement this approach with a more detailed analysis of different customer segments and their specific characteristics.

FAQ : Understanding a customer’s Lifetime Value

What is a customer’s Lifetime Value (LTV)?

Customer Lifetime Value (LTV) is a key indicator of long-term customer profitability. It represents the sum of revenues generated by a customer over the course of its relationship with the company, minus acquisition and management costs. This tool is crucial for optimizing marketing and sales strategies, especially in a competitive environment where acquiring new customers is becoming increasingly costly.

How do you calculate a customer’s Lifetime Value?

To calculate LTV, several elements need to be taken into account: average revenue generated by each customer transaction, purchase frequency, average number of years a customer remains loyal, and acquisition and retention costs. The basic formula is: LTV = (Average revenue x Purchase frequency x Customer lifetime) – Acquisition and retention costs.

What are the advantages of using Lifetime Value for companies?

Integrating LTV into strategic management offers several advantages: optimized marketing investments, improved customer retention, and more precise break-even management. By knowing LTV, companies can adjust their advertising spend, focus on retaining existing customers, and better manage acquisition costs to find the optimal balance between growth and profitability.

How can you improve your customers’ Lifetime Value?

To improve LTV, companies can reduce acquisition costs, maximize perceived customer value, and improve satisfaction and loyalty. This can be achieved by optimizing marketing spend, offering complementary products and services, and implementing attractive loyalty programs. It’s also important to listen to customers’ needs and deal promptly with their complaints, to create a climate of trust.

What are the limits of Lifetime Value as a single indicator?

Although LTV is a powerful tool, it does have its limitations. The calculation requires precise, reliable data, which can pose problems for companies with limited customer history or underdeveloped information systems. In addition, LTV does not take into account certain qualitative aspects, such as the impact of the brand or the influence of customers on their environment, which can play a major role in a company’s long-term performance. It is therefore important to complement this approach with a more detailed analysis of different customer segments.