All You Need to Know about Customer Lifetime Value (LTV) for Brands
November 5, 2022
Knowing your numbers is very important when it comes to making important decisions for your business, but from the sea of data and metrics available in front of you, it is especially essential for us to know WHICH are the key numbers that we should pay attention to - Customer Lifetime Value is definitely one of them.
What is Customer Lifetime Value?
Customer lifetime value is essentially the revenue that an average customer is expected to bring to your business across their lifetime. Having a high customer lifetime value gives you a good gauge about your customer’s loyalty, also, chances are, if your customers repeatedly purchase your products over and over again, you’re definitely doing something right.
Knowing your customer lifetime value (LTV) gives you an idea about how much a customer is actually worth to you, and what is the appropriate amount of money you should spend to acquire a new customer. Given an average order value of $100, if the average customer buys from your brand 3 times a year, the 1-year lifetime value would be $300. In this scenario, it would be fine to only break even on advertising spend on the first sale, or even make a small loss, knowing that the subsequent purchases would eventually turn a profit.
If you have a great product, it will be significantly cheaper (in terms of ad cost) to get an existing customer to spend at your store again compared to acquiring a new one.
How to calculate & analyse customer lifetime value
If we were to put LTV into a formula, it would be:
LTV = Average order value (AOV) x No. purchases per year x Average customer lifetime (in years)
Aside from knowing how much you should invest in acquiring new customers, it is also important to know WHO and HOW you should invest this budget in! This is where segmenting your LTV analysis comes in. At Z21, we recommend segmenting your LTV by time of the year, first order product or even by gender.
Here's an example:
You're a skincare owner with multiple skincare products looking to pull in more new customers, but you’re unsure of which product to focus on.
You find that your top 'First Order Products' are: the Cleanser and Clay Mask. (First Order Product: the first thing a new customer buys from your brand)
Then, you check the Lifetime Value of both products:
Cleanser LTV - $300
Clay Mask LTV - $450
This means that, when an average customer buys Clay Mask as the first purchase ever in your shop, they're prone to buying about $450 worth of products over the next couple of months.
It is now clear that customers that purchased clay masks in their first purchase come back for more purchases in the subsequent months. No matter which product they actually buy in the next purchase, it is a good sign that these customers either loved the product or have a good first impression of your brand, and that you should put more effort (and budget) into advertising for this product to acquire new customers moving forward.
How to improve customer lifetime value
To improve your LTV, you can:
Increase the average order value of your customers with bundles
Shorten the time gap between orders by regularly launching new products
Maximise retention of existing customers with excellent customer experience
In terms of channels to improve your LTV, email marketing is effective, low-cost & effort, and underutilised by many brands. Having email marketing automations in place (abandoned cart, post purchase, birthdays, etc.), product launch and campaign email newsletters are all excellent examples of how businesses utilise email marketing to maintain their relationship with their customers.
These returning customers tend to spend more on your brand, are more likely to be supporting your new product launches, spreading good words around and giving you genuine user feedback - the backbone for a strong brand growth!
So, where to start?
We would recommend looking at your 6-months LTV growth % as a measure of your current situation as well as a baseline for improvement, and monitor over the months as you implement new strategies to improve LTV. Of course, if your product has a longer than average lifespan, for instance, electronics, or furniture, you can look at 12-months LTV growth %.
As a rule of thumb, we generally expect at least 150% 6-month LTV as compared to the first order. We have seen as high as 220% in great brands which have been able to deliver amazing customer experiences. Where does your brand stand?
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