Customer Lifetime Value Calculator

LTV Calculator

What is Customer Lifetime Value (LTV)?

Customer lifetime value (LTV) is the total value of a customer to your business over the entire duration of your relationship. Instead of just looking at single purchases, LTV takes into account the entire history and future potential of transactions with a customer.

This comprehensive approach helps businesses accurately estimate the revenue a customer will generate over time. For eCommerce companies, mastering the calculation and application of LTV is essential.

It enables you to make informed decisions that drive profitability and support sustainable growth. This is done by identifying high-value customers, optimizing marketing strategies, and improving customer retention efforts. Understanding and leveraging LTV helps businesses focus on long-term success rather than short-term gains.

Formula for calculating your Customer Lifetime Value

At Fairing, we focus on cumulative LTV rather than historical or predictive LTV. The primary reason is because it caters to both subscription and non-subscription brands and can hence be used by a larger audience.

To learn more about the various ways to calculate LTV, read here.

In this method, we are talking actual tangible conversions rather than projections. Combining that with Fairing’s zero-party data from your consumers, we believe that this provides your business highly accurate and precise LTV data about your customers. We find this to be a more intricate approach that would allow your business to have greater clarity into your data.

Cumulative LTV focuses purely on transactions that have already occurred, without making projections. For example, if a customer spent $100 two months ago, $80 last month, and $120 today, their cumulative LTV is $300.

The calculations would look something like this:

LTV = $100 + $80 + 120$ = $300

The importance of LTV for your business

Save on finances

Calculating and understanding customer lifetime value (LTV) allows businesses to optimize their spending on marketing and customer retention. By identifying which customers are most lucrative over the long term, businesses can direct their resources towards attracting and nurturing these high-value segments.

This strategy reduces expenditures on less profitable or one-time customers, leading to more efficient marketing efforts, lower customer acquisition costs, and increased profitability. By focusing investments on customer relationships that yield the highest returns, businesses can achieve a better return on their marketing spend.

Furthermore, retaining existing customers is vital because it is more cost-effective than acquiring new ones. Recent studies show that customer acquisition costs in eCommerce have surged by 222% over the past eight years. Focusing on increasing the lifetime value of current customers offers a more economical path to growth.

To do this, businesses must pinpoint and replicate the factors that drive customer loyalty. By enhancing the experience of their existing customers rather than predominantly investing in new customer acquisition, companies can elevate their overall LTV. This approach ensures more sustainable growth by leveraging cost-effective retention strategies that bolster long-term profitability.

Spot and stop attrition

Tracking customer lifetime value (LTV) is crucial for spotting early warning signs of customer attrition. For instance, if a decline in LTV is noticed because customers are not renewing subscriptions, you can take steps to improve your loyalty program or bolster customer support around renewal periods.

This proactive strategy can boost customer lifetime value and, consequently, overall business revenue. Regularly analyzing LTV data allows businesses to identify trends that signal potential churn and take action before it becomes a significant issue. Measures might include providing special incentives to customers at risk of leaving, enhancing product features, or improving customer service. By addressing these issues early, companies can maintain higher LTV and ensure continued revenue growth.

Find and replicate your best customers

Studying high-LTV customers enables you to identify shared traits and behaviors. By understanding what motivates these customers to consistently choose your brand, you can develop a buyer persona and target potential customers who exhibit similar characteristics.

For example, if high-LTV customers have common demographics, interests, or purchasing patterns, you can customize your marketing strategies to appeal to similar prospects.

Furthermore, by gaining insights into the preferences and needs of these valuable customers, you can refine your product offerings and customer service to better align with their expectations. This targeted approach not only attracts new high-value customers but also enhances satisfaction and loyalty among existing ones.

Why use LTV vs. other business metrics

Customer lifetime value (LTV) stands apart from metrics like Net Promoter Score (NPS), Customer Satisfaction (CSAT), Customer Acquisition Cost (CAC), and Churn Rate because it is directly linked to revenue.

  • NPS measures customer loyalty and their likelihood to recommend your brand, providing insight into potential word-of-mouth growth.
  • CSAT gauges how satisfied customers are with specific interactions or products, indicating short-term contentment.
  • CAC assesses the cost of acquiring a new customer, essential for understanding the efficiency of your marketing spend.
  • Churn Rate tracks the percentage of customers who stop using your product or service over a given period, highlighting retention challenges.

However, these metrics are somewhat intangible and do not directly translate to financial outcomes. Customer lifetime value provides a concrete understanding of the financial contribution of loyal customers. Or in the case of predictive LTV, an understanding of their likely future contribution based on past data.

Tracking customer lifetime value helps businesses develop targeted strategies to acquire new customers and retain existing ones while maintaining profit margins. By integrating LTV with other metrics, businesses can gain a comprehensive view of customer behavior and profitability, enabling more informed decision-making and resource allocation.

Use cases: How much are your customers costing you?

Is it wise to acquire these customers?

LTV should be considered alongside customer acquisition cost (CAC). Let’s say you’re running an apparel store on Shopify. You have been marketing your brand aggressively on various platforms and you want to figure out if it’s been worthwhile.

You recently found out that your TikTok customer LTV is $1,200 but the CAC is also $1,200. Your online search LTV on the other hand is $1,000 but the CAC is only $800. With these few numbers in mind, your business might not be profitable unless it reduces acquisition costs for TikTok or invests more in online search.

Balancing LTV with CAC ensures profitable customer acquisition strategies. This analysis helps businesses determine the optimal level of spending on customer acquisition efforts and ensures that the investments made in acquiring new customers are justified by the long-term value they bring.

Conclusion

Customer Lifetime Value (LTV) helps your businesses focus on long-term growth by identifying high-value customers, optimizing marketing strategies, and improving retention. Analyzing LTV data with our calculator allows you to spot early signs of churn, enhance loyalty programs, and improve customer experiences, ensuring sustainable revenue growth. Use our LTV calculator to gain a comprehensive view of customer behavior and boost your business profitability.

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