Why calculating customer lifetime value (LTV) is key to your business’s success?

Customer lifetime value (LTV) is the single most important metric to understand the long-term health and profitability of your business. It enables you to look beyond short-term KPIs that are easily affected by macro events, such as seasonality, political-economic factors, and global pandemics.

In a nutshell

Focusing on your LTV enables accurate long-term planning and during critical moments, strategic business change.

Epsilon has created a series of video and blog ‘explainers’ to guide you through key aspects of customer-centricity. Topics range from calculating customer lifetime value and boosting loyalty to customer acquisition and incremental growth.  

An example of long-term planning

If customer LTV is £4,000 pounds and customer acquisition costs £400 pounds, you are exchanging 10% of your LTV margin to acquire your customer. This figure can be factored into your costs.

However, accurately understanding LTV and the cost of customer acquisition is a significant challenge for many businesses, making it harder to leverage the relationship between LTV and marketing channels that generate incremental lifetime value in an efficient way.

How to calculate LTV:

Multiply AOV by the frequency of purchases made by your customer over their lifespan. AOV is revenue divided by the number of sales you made. This may sound easy but, there is a key factor many brands are missing.

Can you overcome the customer identification challenge?

Frequency of purchases is difficult to calculate and becomes an even bigger challenge when customer touchpoints are not joined up over time. For example can you:  

• Track and reconcile individual customers’ purchases across all channels?
• Account for guest transactions online and anonymous transactions in store? 
• Calculate how much leakage there is? 
• Identify lapsed customers, rather than treat them as a new acquisition? 

These customer identification challenges, and others like them, can hugely skew LTV measurement undermining your growth and profitability forecasting – not to mention making it difficult to optimise marketing channels activity. This is why creating a single view of customer purchases over time is so critical.

Five ways to improve your LTV

1. Loyalty programs. Is your loyalty programme discounting designed to grow LTV or are you cannibalising your margins? It’s important to think carefully about how you reward customers.
   
   
2. Avoid proxy KPIs. It’s time to move away from using clicks and views as a metric. They are an inaccurate measure of incremental growth. Focus instead on customer experience at each stage of the journey.
   
   
3. Customer-centric messaging. Ensure your messaging is focused on customer needs, rather than a short-term business goals. A product chasing a customer around the internet is a prime example of this.
   
   
4. Customer identification. Develop the capability to identify and track customers across different devices and browsers. This will enable you to have a coherent dialogue. Fundamentally, this is about being able to remember the last thing that you said to a customer/prospect.
   
   
5. Accurate measurement. Not just of what your LTV is at a fixed moment in time, but the impact your marketing is having on incremental growth, so it can be adjusted and improved.

The bottom line

In a highly competitive world, marketing is vital to protecting or growing marketshare. So understanding how your marketing interacts with your customers becomes extremely important. If you have a single view of purchases over time, it really pays to start building out a single view of your customer marketing over time to fully understand your LTV and provide context.