LifeTime Value (LTV) is a term used in product management to measure the total value a customer brings to a business over the course of their relationship. It is an important metric for businesses to understand because it helps them make informed decisions about how much to invest in acquiring and retaining customers.
To calculate LTV, businesses need to know the average revenue per customer (ARPU) and the average customer lifespan. The formula for LTV is:
LTV = ARPU x Customer Lifespan
For example, if a business has an ARPU of $100 and the average customer lifespan is 3 years, the LTV would be $300.
Why is LTV important?
LTV is important because it helps businesses understand the long-term value of their customers. By knowing how much revenue a customer is likely to generate over their lifetime, businesses can make informed decisions about how much to spend on customer acquisition and retention.
For example, if a business knows that the LTV of a customer is $300, they may be willing to spend up to $150 to acquire that customer. This is because they know that over the course of the customer's relationship with the business, they will generate more than enough revenue to justify the acquisition cost.
Using LTV to improve customer retention
LTV can also be used to improve customer retention. By understanding the factors that contribute to a customer's LTV, businesses can identify areas where they can improve the customer experience and increase customer loyalty.
For example, if a business knows that customers who use their product for more than 6 months have a higher LTV than those who use it for less than 6 months, they may focus on improving the onboarding process to encourage customers to stick around for longer.
In conclusion, LifeTime Value (LTV) is an important metric for businesses to understand. By knowing the long-term value of their customers, businesses can make informed decisions about how much to invest in acquiring and retaining customers. LTV can also be used to improve customer retention by identifying areas where the customer experience can be improved.