Customer Lifetime Value (LTV)

Back to basics, how can we define the Customer Lifetime Value?

Well, you can find online many creative ways to define it. I have my own practical view about.

The Customer Lifetime Value is the value that the customer generates to our business during his useful life.

Talking about the LTV is not a matter of getting the right formula or the online calculator. Is all about taking my definition above and translate it into business numbers.

First and most important, the term value. The value provided by the customer to our business is not expressed in terms of revenues.

The value is the total revenue from the customer minus all the variable direct costs and other non-variable direct costs.

Sounds tricky? Wait a second. I'll show you an example.

The customer, in the past 12 months, has bought from us the same pack of pencils for ten times at the price of €10 + VAT. The pack of pencils costs to us €4,5 + VAT. While the shipping box costs to us €0,5 + VAT.

The customer has hence generated €100 in revenues, but for each sale, the sale margin was €5. So, the Customer Lifetime Value is €50. That's all. Revenues minus direct variable costs. VAT should always be excluded.

If you want, you can also assign to the product sales some non-variable costs, like customer service. This much depends on you.

The eample is very simple, but it helps to understand the topic in brief.

What is the customer useful life? The customer useful life is a statical value, expressed in months, that tells how long the average customer may be willing to buy again after we acquired him.

The customer is willing to buy again from us if we give him any reason to do it, crystal clear.

The example was made considering the past customer orders. But what about estimating the total customer revenue in the business planning phase?

To estimate the total customer revenue, we can multiply the average product price by an estimated number of repeat purchases.

These figures may come from our historical data or we may assume them.

Finally, if we have a huge product/service offer with a wide range of price, we can compute different LTVs based on customer segments, each of them having a different average price.

The example was easy on purpose. When we have to apply the concept to our real business, we should find a way that fits it.