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Your Most Important Business KPI is LTV (Customer Lifetime Value)

There are so many metrics to monitor in your business — website traffic, email open rates, monthly revenue, or your Instagram engagement. However, the most crucial metric to focus on is Lifetime Value (LTV). LTV represents your customer's monetary value over a given period. And this is where you really make the money.

Real-Life Example of Customer Lifetime Value

Let's look at a real-life example: Quip, a toothbrush brand that I personally love and use!

  • Entry point: Their toothbrush costs $30.

  • Subscription: You can subscribe to receive a replacement brush head and a battery for $7 every three months.

If you buy the toothbrush and subscribe for a year, your customer LTV is $58. This is the math: the initial toothbrush cost ($30) plus the yearly subscription cost ($28).

Why LTV is Crucial?

Lifetime Value gives you a comprehensive view of a customer's worth to your business. Not just monthly revenue or average order value. LTV combines it all, and knowing this number enables you to make smarter marketing decisions. And that is what we want!

OK so now let me tell you two stories about LTV that I figured out this week with two different strategy client's of mine.

Scenario 1: Revenue Growth Strategy

Their Goal: Revenue growth through in two ways:

  1. Acquiring new customers.

  2. Increasing LTV of existing customers.

This client has a high returning customer rate but struggled with understanding how much to spend on acquiring new customers. They had tried various ad agencies, focusing on Return on Ad Spend (ROAS). However, without knowing their customer LTV, they couldn't determine the correct ROAS.

Here's What I Figured Out: We calculated the LTV for new customers in 2023:

  • New customers: 1,700

  • First order total: $100,800 (average order value $59)

  • Subsequent order value: $6,000 to $8,000 monthly

Total spending in 2023 by these new customers was $184,000, resulting in an LTV of $108 per new customer.

Scenario 2: Lead Generation and Profitability

Their Goal: Increase revenue by acquiring new customers through lead generation ads.

Here's What I Figured Out: We evaluated the cost per new customer acquisition to ensure profitability:

  • Total new customers in 2023: 1,000

  • First order total: $34,000 (average $34 per person).

  • Subsequent orders value, within the first two months: $4,600 and $2,800, then tapering off.

Lifetime sales from these customers were $54,000, resulting in an LTV of $54 per new customer.

Also, we learned something else really important from this data. This client's LTV maybe shouldn't be looked at over 12 months, because their customer get what they need in the first few months, and then taper off how much they spend. Their customer lifetime may be more like 6 - 8 months. So you can see how that would help us make good marketing choices, putting a lot of effort in those new customers first several brand experiences.

Calculating Marketing Spend Based on LTV

How do you determine your marketing spend based on LTV? A general rule of thumb is to keep your cost to acquire a new customer (CAC) at least four times less than their LTV. This accounts for typical profit margins and various business expenses.

For my two clients:

  • First client: Recommended ROAS is 5-6x for profitability.

  • Second client: A 2-3x ROAS is sufficient.

Do You Know Your Customer Lifetime Value?

Understanding and optimizing your LTV is crucial for making informed marketing decisions and ensuring your business's profitability. If you need help calculating your LTV or figuring out your marketing spend, feel free to reach out! I have extensive experience working with numerous business owners, and I’m here to help you.

If you suspect your agency isn’t providing the full picture or want to verify their effectiveness, let’s chat. I’m always happy to provide insights and answers.

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