# LTV indicator: concept, importance, methods of calculation

The task of any business is profit. It is important not only that it brings a lot of money, it is necessary to distribute them competently. It is for this reason that a systematic analysis of efficiency is an integral part of a successful business. One of the main indices used by marketers is the LTV indicator.

## What is LTV

LTV is an abbreviation, translated as the "customer life cycle". This indicator shows how much each buyer brings the company's money for all the time of cooperation with it.

Usually, two methods of calculating this index are used.

- Historical, taking into account the total value of income that a particular buyer brought to the company.
- Forecast is necessary for building more complexbehavioral model of the buyer. He takes into account which goods (services) are more interesting to the client, in what price range are his preferences, what is the frequency of purchases. On the basis of statistical data, a forecast for the future is formed, which makes it possible to forecast its acquisitions.

## Importance of LTV

For the effectiveness of business, regular customers are of great importance. The cost of keeping them is lower than attracting new ones. Therefore, the client's life cycle is longer, the business is more profitable.

Calculation of this indicator allows us to identify whichways to attract buyers work most effectively. It allows you to abandon ineffective. And it also makes it possible to compose a "portrait of the buyer", that is, what is the age, gender, social status of the main clients. It is important to strive to increase the LTV index in comparison with the cost of attracting customers.

Separately, it is necessary to analyze customers,bringing the greatest income. This allows you to determine which group of consumers they represent. Marketing analysis will help determine the optimal advertising channels and the proper delivery of information. In addition, it will allow to revise the assortment of products or services, getting rid of those using minimal demand and adding those that are of interest to regular customers. This will prolong the period of their loyalty.

Building a business centered on the lifetime value will provide a serious competitive advantage.

## Simple calculation formula

There are several methods for calculating LTV. The specific choice depends on the specifics of the business. To calculate using the simplest method of calculating little information is needed. Simplicity is its advantage. The disadvantage is getting only basic information. In order to calculate the LTV index, it is necessary to know what amount of income the company has brought to a specific client for the entire time of cooperation. In addition, you need to know how much the company has spent so that this buyer retains its loyalty.

With this data, it is not difficult to calculate LTV. In this case, it equals the difference between income and expenditure.

## Basic calculation formula

It is based on averages. Since the error rate of application of this formula is large enough, it is recommended to apply it segmented. That is, it can be used for marketing analysis of various products.

In this case, LTV is a derivative of three indicators: the average selling price, the average number of sales per month and the average number of months of customer loyalty.

## LTV with outflow coefficient

This method of calculating the indicator is used in business related to the sale of software products.

In order to calculate the coefficient of outflow of customers, it is necessary to divide the total number of buyers who left the month by the number of customers who made payment for the last month and multiply by 100.

Having calculated the outflow coefficient, you can calculate LTV with its allowance.

To do this, the average monthly income from the buyer must be divided into the already known coefficient of outflow.

If the outflow rate is 5%, then this ismeans that each customer retains their loyalty within 20 months. Then he ceases to be a client of the company. If the average monthly income per buyer is 100 rubles, then the average income per customer will be 2000 rubles. (100 rubles x 20 months).

Having data on the average number of customers who cease to be, and the value of the average check, you can calculate the average customer lifetime value index for a particular business.

If the amount that is spent on attractingclient, equals or exceeds the value that it brings, then such a business can not be called successful. It is necessary to introduce changes, due to which the cost of attracting the buyer should decrease, and the value of the life cycle will increase. Thus, it is necessary to think about maintaining the client's loyalty for the maximum possible period.

## LTV and email distribution

Emailing is greatway to increase the LTV. In this case, simple advertising information will not be perceived by users, and, most likely, such a letter will be deleted. Therefore, some tricks should be used. For example, the most valuable customers with a high level of LTV can send a promotional code, which will give a good discount for the next purchase. Those who spend less money, you can give a more modest discount.

The dispatch should be regulated depending on thecustomer loyalty period. At first, it should be more often introduced to new products and shares. Those who remain faithful for more than a year should send letters less often and with the information most valuable to this category of buyers.

It is necessary to offer to buy related products and accessories. A selection with the recommended goods can be sent to e-mail after the customer has bought something.

Companies that sell programs, access tofilms, books and music, are increasingly being offered a subscription that can be purchased for a period chosen by the consumer. Subscription service allows to improve the LTV.

Keeping a client is always easier and cheaper than attracting a new one. Therefore, it is so important to monitor its life cycle.