The Complete Guide for Beginners
What is LTV and why is it important?
LTV in simple terms
Lifetime value—also called customer lifetime value (CLTV) –
As shoppers, we develop loyalty to our favorite brands.
We have no trouble in choosing to spend money with them and we are in good company. In fact, it is this type of loyalty that companies develop strategies to cultivate so they can succeed in the long run. If you look at industry behemoths like Amazon, Apple, Nike, Spotify, and Starbucks, these retail and eCommerce brands all have two things in common: They rank among the top brands with the most loyal shoppers and they also rank among the world's top 100 most valuable brands. That's because, as the key performance indicator lifetime value (LTV)—a measure of loyalty that's a make-or-break factor for business success—illustrates, nurturing brand fans is a strategy that can pay off in a big way. As we know, it costs 5x more to obtain a new customer than retain an existing one. However, acquiring another High LTV customer over a regular one has exponential results on growth in the long term.
For most DTC brands, 20% of customers generate 80% of the gross profit which means high-value customers generate up to 16x the gross profit of standard customers. If 20% of customers are the most profitable, there’s a bottom 20% of customers that will never pay back the cost to acquire them. With rising costs and changes to privacy, it’s more important than ever to optimize the business on customers that will generate the most gross profit.
In the worst-case scenario, when LTV is low and customer acquisition costs (CAC) are high, businesses fail. Any time companies invest resources to attract new customers, the hope is the expense will pay off and lead to long-term loyalty, not a series of "one-and-done," kick-the-tire type of customers. The importance of LTV to marketers, eCommerce managers, and business leaders cannot be understated. There's a reason Forbes declared customer lifetime value the "only metric that matters" and Entrepreneur said it is the "most significant measure to benchmark.” In fact, there are three key reasons to start paying attention to LTV—right away.
The Math
You are not alone if you haven’t been effectively tracking LTV. Over 58% of businesses, according to a survey conducted by Econsultancy—say they're unable to measure customer lifetime value.
Why?
Most brands look at historical gross profit and measure LTV in retrospect. Past purchases alone do not predict future performance and you may have a customer who historically buys one a month, but then suddenly churns.
Limits to collecting first-party behavioral data with changes to privacy. This data allows you to identify life-changing events or purchase behaviors associated which can tie directly to a customer's LTV.
Complex machine learning needs to incorporate seasonality and factors specific to each business, though hard to model. Your customer journey, buying cycle and products are unique and can’t be modeled like any other business. Out-of-the-box solutions for predicting LTV exist, but are only advisable for out-of-the-box ecommerce companies that fit median purchase patterns and appeal to the median US consumer (Is that really you??)
How to Define LTV
First, it's important to keep in mind customer behavior is complex, variable, and highly specific to each individual—as a result, how to best predict it will vary from company to company and will also require reliable data analytics, analysts, as well as strong forecasting capabilities. To illustrate the process at a high level, we've simplified the calculation for businesses operating within the eCommerce context.
LTV = Customer Value x Average Customer Lifetime
Customer Value = Average Order Value X Purchase Frequency
Gross profit Upside = the amount of gross profit to be gained if churn is prevented
Payback LTV = the amount of gross profit obtained from a customer 12 months from initial purchase
If you'd like to level up and begin tracking this key metric, we'll walk you through how to calculate LTV.
How to Improve LTV you can do right now
Now that we understand how LTV is calculated, let’s uncover the levers you have access to which can help drive additional growth.
AOV
The goal here is to get customers to spend more with each order. Recommending bundles based on LTV is a strategy that ensures High LTV customers increase their AOV to match the LTV potential.
Purchase Frequency
The goal here is to get customers to purchase more often. With post-purchase recommendations, re-stock reminders, and sending campaigns based on customer lifecycle, you should expect to see a purchase frequency increase.
Customer Lifetime
The goal here is to retain customers—keeping them engaged across their stage of the customer lifecycle journey—for as long as possible.
Here are some immediate actions you can take to work on positively impacting LTV.
How to Improve LTV with Predictive Analytics
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The goal here is to acquire more valuable customers at less spend systematically. The most effective gross profit-increasing strategy is value-based optimization (VBO)
VBO means pushing Realtime LTV back to acquisition platforms like Google and Facebook, enabling the platform-native algorithms to set impression bids for prospects most efficiently.
Results for our customers:
(1) Lower CAC; Higher LTV
(2) Acquiring better customers automatically and consistently over time.
The result can be massive, with an average increase in the High LTV Rate of customers acquired by 25% or more. In fact, Google, Facebook and TikTok tout value-based optimization based on Realtime LTV as the next back thing.
Initially, this company acquires 2,000 high LTV customers and 8,000 regular customers
With VBO supported by Realtime LTV, the company will acquire 2,000+(2,000*0.25) = 2,500 High LTV customers and 7,500 regular customers
ROI from this acquisition campaign will increase by 20%
Ocurate helps you run this randomized test and measure results so you begin to understand what the causal lift on gross profit looks like for you and your customer base.
Identify customers at risk of churn so you target those customers worth retaining and increase their lifespan.
Ocurate allows you to focus your retention strategies on customers that are actually worth retaining and aren’t unprofitable in the long term. LTV combined with churn probability helps you understand how much additional gross profit can be gained from each customer through a perfect retention campaign. This allows you to send incentives with the goal of incentivizing retention to only those customers who will perform the best and closely mimic your high LTV, loyal customers.
Currently, you send incentives to all customers in a certain churn bucket. Let’s assume:
Customers at risk of churn
Retention
Rate
Retained Customers
Let’s say we target high LTV customers at risk of churn with a more generous incentive to stay, increasing the conversion rate. Out of the 200,000 high LTV customers at risk of churn (20% of 1M), we can now retain 12%, because we may give a free item with the next purchase – which is exactly what Wild Earth did. The pool of regular customers at risk of churn (600,000) converts as before at 10%, and we avoid incentivizing unprofitable customers altogether.
Now, we have 84,000 customers newly retained, 24,000 high LTV, and 60,000 regular customers, but no unprofitable customers. In a single campaign, we will have decreased our loss in profit caused by churn by at least 23%, and that is not even counting for the savings in not attracting non-profitable customers, which is hard to calculate because the pro capita loss looks very different for each customer.
Our customer, Wild Earth focused their retention efforts on high LTV leads (Free dog treats with the next purchase), treated regular customers as before, and ignored unprofitable customers. The result: In three months, Wild Earth was able to decrease high LTV churn by 16%, netting the company a causal increase in gross profit of >$220,000 from a single campaign.
Identify audiences to run experiments against LTV-increasing strategies and observe the effects directly. Your customer journey, products, and customers are unique to you. Discover what truly drives your customers to take action.
Ocurate allows you to focus your general LTV/gross profit-per-customer-increasing strategies or initiatives that actually work, i.e. yield a measurable result. The Experiments section in the Ocurate Portal helps you understand whether the LTV for your test group has gone up as a function of your offering.
High LTV/ Low Churn Customers
Custom Audience Creation from Predicted LTV
Create look-alikes from current Hight LTV/Low churn buyers.
Suppress a list of low LTV/High Churn customers.
Identify interests from High LTV audiences to clearly target ad campaigns on paid channels
Ocurate insights report
Identify locations associated with High LTV
Adjust targeted bidding by location
Identify attributes/interests associated with High LTV
Target interests and demographics on social channels (Facebook, Insta,Youtube, TikTok)
Identify the best customers to convert into brand ambassadors and introduce them to your loyalty program
Develop a custom loyalty plan based on specific behaviors tied to High LTV customers
Moment of Delight - targeted to High LTV buyers
Free Item
Special Offer - Build FOMO for those not at a certain level of loyalty
Special bundle of items (identified by what High LTV users are more likely to purchase together)
Custom product release on website
High & Medium LTV Customers
Cross-sell/upsell relevant products associated with initial purchase
Introduce to loyalty program
Create custom levels based on the tendency to spend/engage
Introduce referral program
Reward individuals who bring in High LTV customers
Customize rewards based on behaviors associated with higher LTV customers
High Revenue Upside/ High Churn
Incentivize with a minimal free gift or free shipping in the next order
One-Time Purchasers
Promote savings and benefit of subscription packages
Bundle offering at a discounted price
Send a customized note in the mail
Target with a custom support phone call to get feedback
Record a video to send via email reaching out
Medium Revenue Upside / High Churn
Email survey requesting feedback with a custom offer related to their purchase
Target with custom ads to incentivize the next purchase
High & Medium LTV/ Churned
Send survey for feedback and incentive response
Retarget with custom ads
Reengage with an offer via email/SMS
Low LTV/ Churned
Target with unique content educating around product
Promote new product to reengage with the brand
All Levels of LTV
Identify content sequences to cater to each level of buyer
Identify bundle offerings to incentivize increased average order value
Individual offers for each level of LTV
Customer your Welcome Emails Series based on predicted LTV
Identify content sequences to cater to each level of buyer
Survey LTV groups to better understand preferences and develop community
Other Use Cases
Affiliate LTV Success
Identify affiliates bringing in High LTV customers
Develop a custom compensation plan based on the quality of customer
Evaluate influencers on who drives more High LTV customers
High LTV Attribution
If tracking conversions consistently, you can understand which channels are bringing High vs. Low LTV customers.
LTV as The Guiding Principle
With your best customers bringing in about 80% of your business's gross profit, you want to cater to those high LTV customers and bring more of them to the table. While this can become your sole focus, we don’t want you to forget about the rest of your customers. If we look at the following strategies to implement across the board, you will work to improve LTV across your entire customer base.
Segmentation
Understanding your most influential segments and what the identifying traits are of those segments allows you to group customers more effectively and queue up offers and communications they care about most.
Value - (high-value, discount seeker, frequent shopper)
Lifecycle Status (awareness, consideration, conversion, loyalty)
Demographics (gender, location, age, marital status)
Predicted Lifetime Value (an aggregate of the above data points plus attitudes and behaviors to clearly map out how much each individual customer will spend with you)
Personalization
Customer lifetime value is an amazing metric to prioritize your customers and better understand the health of your business. However, as you scale efforts, make sure you are carrying best practices to the other 80% of customers who are bringing in gross profit to your business. While the offers might vary, the experience doesn’t. This will open the door to continue growing the pool of 20% who are loyal so they become the majority and not the minority.
Customer Data is Not Enough
Acquiring More Customers Won’t Solve Your Growth Problem
