What does LTV mean?
Although, often over quoted, the term LTV (Life Time Value) is one of the most underutilized but fundamental marketing concepts. The concept is ( see Customer Equity) based on the belief that the customer is the unit value for an enterprise and the sum total of customer value is equal to the enterprise value. But, how useful is this concept for those involved in the daily grind of running a marketing department?
We've been talking to several potential customers who have talked with marketing intelligence companies that provide on-demand LTV predictions that are updated nightly. While most organizations are interested in understanding the future value of their customers, they don’t necessarily know how they’ll use LTV predictions. LTV can be interpreted in several different ways.
Value – can be be revenue, margin, variable contribution margin and may include or exclude acquisition cost depending on the use case
LT – lifetime : could be historical, projected, upside etc.
Based on these definitions:
- LTV-Historical: Historical value of customer looking back since acquisition or last X months
- LTV-Projected: Projected value of a customer looking forward 2-3 years
- LTV-Upside: Potential upside in customer value per year
These three different measurements/predictions can be utilized in different ways.
This metric can be used to understand customer value trends including whether a customer’s value is trending up or down, or if they are new/reactivated, or lapsed or inactive. The change in LTV-H can can be used to trigger lifecycle campaigns
This metrics is best used for a) acquisition source optimization and b) customer on-boarding
- Acquisition Source Optimization; Based on short term LTV-P projections, a marketer can estimate which acquisition channels provide the best customers. It is best to use short-term data for this calculation due to the changing nature of sources of acquisition and offers. If a marketer makes decisions on based on projected LTV derived from old data the calculations will not be accounting for fast changing digital flows that happen in ad networks,keyword trends, and other modern acquisition channels.
- New Customer On-boarding: Another application of LTV-P is on-boarding customers. When a new customer is acquired, utilizing LTV-P and other observed and implicit properties of the customer (e.g., demographics, first order revenue, categories, email, web behavior, etc.), a marketer should devise an on-boarding process to ensure a successful second order from the customer. Customers are usually very expensive to acquire, and more than 50% of new customers never come back to make a second purchase. Successfully on-boarding a customer could significantly increase LTV, impacting value in a compounding manner. In other words, increasing new customers retention metrics will have a compounding downstream effect on the value of customers, and thus the value of the company.
This is the most underutilized LTV metric. Most organizations observe and predict value based on customer transactions. However, very few companies calculate and utilize the upside potential of a customer. Successfully calculating and operationalizing this metric will allow marketers to focus on the high potential customer within the context of acquisition, reactivation and growth objectives.
Focusing on LTV is very important, but using LTV to create actionable triggers is perhaps more important than knowing exactly what the LTV is. Additionally, once triggers have been set, it’s the campaign effectiveness that allows a marketer to achieve customer objectives. I’ll discuss campaign effectiveness in a separate post.