Understanding Lifetime Customer Value (or LTV)

Lifetime Customer Value or LTV is a crucial concept in analytics, a metric that simply express what the customer is worth (value), from the time she signs up, throughout her lifetime of interactions with your app, in the future. Through a general formula of value of same x number of repeated transactions x projected length of customer retention, you are able to reconcile how much money you spend on each user, the acquisition and retention costs, versus how much value the customer brings back over a period of time.

LTV also goes by the names of Customer Lifetime Value (CLV) or Lifetime Customer Value (LCV).

Let's say you spend $8 procuring a customer, based on marketing and other efforts, once at the start, you ideally need to get something back in return, in a sustainable model. In return, your user subscribes to your service for $9.99 a month, for 8 months, the total LTV of $79.92.

Bare in mind that there are variables in here, which makes this an estimate rather than anything more concrete. The projected length of a customer retention is an estimate, as is number of repeated transactions, as past history isn't always an accurate indicator of future behavior, and if any of the variables are way off the mark, LTV becomes useless. Therefore, use this tool diligently and in conjunction with other metrics, rather than as a sole metric.

LTV is also a long-term game, not a short one, and even if the cost of acquiring a user (Customer Acquisition Cost or CAC) is higher than the initial value, you should aim to have a longer projected length of customer retention, as value increases intangibly for your users, so longevity is key here. Often times, a happy customer over a longer retentative period means their value can increase through upgrades and other cross-selling measures.

Speaking of intangibles, last but not least, you cannot measure the viral value of customers as easily. Word of mouth, social media spreading and customer advocacy of your product through being a satisfied customer yields increase brand awareness and more users, thereby reducing customer acquisition costs for other customers. So, in conclusion, LTV is a strong tool, great in venture pitches, and works better with other metrics, for correlative purposes, rather than alone.