Life Time Value or Customer Lifetime Value (LTV) is a metric that estimates the total value that a customer will bring throughout his entire relationship with the company. This value is calculated by adding up all the revenue generated by the customer during the time they remain active, discounting the costs associated with customer acquisition and retention.
LTV is crucial for:
- Evaluating profitability: it allows you to determine how much you can spend on marketing and customer acquisition without incurring losses.
- Customer segmentation: helps identify and segment the most valuable customers, enabling more effective and personalized marketing strategies.
- Strategy optimization: facilitates decision making on retention strategies, promotions, and product or service enhancements.
- Financial forecasting: contributes to financial planning and future revenue projection.
In conclusion, the LTV of a customer measures long-term profitability and helps digital companies to design more effective strategies to maximize the value of each customer.
The formula to calculate LTV is as follows:
LTV = Average spend * Recurrence of acquisition * Customer life
