If you are starting a business it is very important that you have your metrics well organized and optimized so you increase the chances of having a thriving business in hands. I’ve talked about CAC in the past and today I decided to talk about LTV – Lifetime Value of a customer – a metric that tells you the value that a certain customer X (or the average) brought to your company. The reason I decided to bring this metric after talking about CAC is because LTV and CAC are correlated in a very specific way, but I’ll talk about it later in this post.
How To Understand LTV?
In order to make you understand what LTV is and how do you measure it, let’s take as an example, RedBull.
Last year my friend Jerry had a very intense routine and unfortunately not a very healthy diet: he used to drink a RedBull can every two days and spent, let’s say $2.5 a can. This means that he spent $8.75 a week, around $35 a month, making a total of $420 a year on RedBull – meaning, a heart attack, right?
But after a year he noticed that he needed to change to a healthier drink and now he only drinks water. This means that the LTV of RedBull for Jerry’s case study was $420 because that’s the total value that Jerry brought to the company as a customer.
Now, how does the CAC of RedBull relate to its LTV? It’s very simple: if it costs more to Redbull to acquire customers than the value those same customers bring to the company, then they will not be selling their products in the near future. There has to be a ration and after many years of studying metrics, the market knows that a good ration between LTV and CAC is 3 to 1, meaning that you should get from your customers three times more than it costed your business to acquired them.
In the RedBull and Jerry case, the total CAC value for RedBull shouldn’t be higher than $140.
Why Should I Know My LTV?
Well, if the reasons presented before aren’t good enough, I think it’s important for you to know that LTV is a great metric to predict how profitable your business will be, which can tell you also how much you’ll be able to reinvest in your company, making your CAC even smaller and increasing your LTV once again, starting a loop! If that’s not a good reason for you, let me know what would it be a good reason for you to know your metrics right!
How Do I Calculate LTV?
Right now you are interested in calculating your LTV, am I right? Wait, you’re not? Well, anyway, you should be! And if you are, you should know that in order to do it you need only two different data types: the Customer Value and the Average Customer Lifespan. You should also know that the Customer Value is the product of Average Purchase Value and Average Number of Purchases.
If you are starting your own business, you now know how to make thrive!
If you want to learn about other metrics, I recommend you read “How Much Do You Spend To Get New Customers?” and “You Have To Measure This Great Metric!” – this way you’ll be a master of metrics in no time!
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