So, what is one of the most important things a company must look into to strategize their plan of action like how much to spend to generate a customer, what should be the pricing of subscription plans, the duration of the subscription & much more.
YES! The Lifetime Value of Customer (LTV), means the estimated amount a customer will be spending on a company for their products.
So, let’s see how to calculate this in an easy & comprehensive manner.
Calculating Lifetime Value of Customer (LTV)
Going for terms,
Amt. of Purchase (in $) = Average Amount per Purchase made by the customer. To take as a measure you can use 1 month, 3 months or annual basis.
Frequency = Average No. of times purchases made in a year.
Term = Expected year of subscription.
Let’s take an example, Customer A bought a monthly subscription of $100 & the company calculated that a customer spends an average term of 8 years with customers subscribing to it every month.
So, Amt. of Purchase = $100, Frequency = 12 & Term = 8 years
Hence, Lifetime Value of Customer A = 100*12*8 =$9600.
How does LTV help?
This calculation helps the company in the following ways:
- Deciding on the spending required for generating leads and creating customers.
- Pricing of products with time for which it should be provided.
- Efficiently growing up the business.
- Also, making the product beneficiary for the customer.
So, in this simple way you can calculate the Lifetime Value of the Customer.
Hope you liked it.
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