What is Lifetime Value (LTV)?
LTV is a prediction of the net profit attributed to the entire future relationship with a customer. To calculate LTV, follow these steps for a given time period: This is a critical aspect of the digital ecosystem, offering numerous examples and case studies that illustrate its application across different industries and scenarios.
Example
Let’s consider a B2B software-as-a-service (SaaS) company that offers project management software to businesses.
Average Annual Contract Value (ACV): The average annual contract value per customer is $10,000.
Average Customer Lifespan: The average customer retention period is 3 years.
Customer Acquisition Cost (CAC): The company spends $20,000 on marketing, sales, and onboarding activities to acquire new clients.
Using the formula:
LTV =AverageAnnualContractValue×AverageCustomerLifespan/ Customer Acquisition Cost
In this example, the Lifetime Value (LTV) of a customer for the SaaS company is $1.5. This means that, on average, the company expects to earn $1.5 in revenue for every $1 spent on acquiring new customers. This insight helps the company evaluate the effectiveness of its sales and marketing efforts and allocate resources to maximize customer lifetime value.