Welcome to the latest edition of our new weekly blog series, Marketing Definitions. Each week, we will identify an oft-used term or phrase in the marketing community and break down its use and meaning for the broader population.
Last week’s term that we defined was UX.
Today’s Term = Lifetime Value
Lifetime Value, abbreviated LTV, is a term that marketers and business owners use in reference to their customers. The LTV of a customer is the total amount of money they spend with your business over the course of their lives.
Lifetime value is an important metric to know because it gives you the best picture of what a customer is worth to you. Some companies calculate the “average order value”, which only takes into account one purchase at a time. But lifetime value gives you a much better idea of the value provided by each new customer.
When you have a relatively good idea about the LTV of a new customer, you know what you can afford to spend on advertising and marketing to acquire a new customer. By comparing your customer acquisition cost to your LTV, you know your margin.
If the data is available to you, you can calculate total revenue divided by total number of customers over the history of your business. But most systems and databases do not go back far enough to get a full look at lifetime value.
So to calculate lifetime value, you may have to make some broad generalizations. How many purchases does each customer make? How much is each purchase worth?
Next time you hear the term lifetime value, you’ll be in the know.
That does it for today’s definition. Have a term you’d like defined in a future post? Email us or post it in the comments below.