How to Think About LTV in Marketing: Use Cases and How to Grow It
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Last Updated:
Category: CRM, LTV & Customer Management, Marketing Glossary
Published:
Last Updated:
Category: CRM, LTV & Customer Management, Marketing Glossary
Authors: Shusaku Yosa
LTV (lifetime value) is a metric that expresses the value one customer brings to your company over the period of the relationship. As the cost of acquiring new customers rises and building long-term relationships with existing customers gains importance, it is drawing ever greater attention on the marketing front lines. This article organizes the basic way of thinking about LTV and how to calculate it, then explains why it is emphasized in marketing, how to use it, and concrete methods for growing LTV—all from a hands-on perspective.
LTV is short for "Lifetime Value." It refers to the total revenue or profit that one customer (or one company) brings to your company over the period from the start to the end of the relationship.
The key point is to grasp a customer's value not by the revenue gained from a single transaction, but by the "cumulative" total that includes repeat purchases from the second time onward. For example, a customer who keeps purchasing again and again has a higher LTV than one who leaves after a single purchase. By looking at LTV, you can visualize not just immediate revenue but the value that arises from a long relationship with the customer.
In recent years, there are several environmental changes behind LTV gaining attention as a key marketing metric.
Because of these changes, not just "how much can you acquire" but "how much can you grow the value of acquired customers" has come to divide marketing results.
There is not just one formula for LTV; you use them according to your business model and objective. Here are the representative ones.
The simplest is to multiply purchase value, purchase frequency, and duration together.
This calculation method suits businesses where value and frequency are easy to grasp, such as EC/retail and subscription purchases. It is used as an entry point for understanding the concept of LTV.
When you want to see profit rather than just revenue, multiply by the gross margin rate and further subtract the customer acquisition and retention costs.
Even if revenue is growing, a business cannot be called sound if profit does not follow. By including costs, you can grasp the value that actually remains in hand.
Using the churn rate, you can concisely calculate the LTV of subscription-type services.
For example, at a monthly fee of $30 and a churn rate of 5%, LTV = 30 ÷ 0.05 = $600. You can intuitively understand from the formula that the higher the retention rate (the lower the churn rate), the larger the LTV.
LTV is not something you calculate and then are done with; it has meaning only when used in decision-making. Here are some representative use cases.
LTV becomes the basis for how much acquisition cost you can spend on one customer. If you keep the acquisition cost within the range of LTV (profit-based), the math works out to be profitable over the long term. You can use it as a guide for the maximum amount you can invest, as in "LTV × gross margin rate = maximum CPA."
The "LTV/CAC ratio (unit economics)," obtained by dividing LTV by customer acquisition cost (CAC), is a representative metric for measuring the soundness of a business. Generally, 3 or higher is considered sound, and below 1 means you go into the red the more you acquire. Conversely, if the ratio is too high, there is a possibility that investment in acquisition is too passive and you are missing opportunities.
When you divide customers by attributes and behavior and compare their LTV, you can see which segments to focus on. For example, if one segment's LTV is twice that of others, you can make the judgment to allocate resources intensively to that segment. LTV becomes a compass for deciding where to allocate a limited budget.
LTV can be raised by working on each element of the formula. Here are five representative approaches.
Upselling, which encourages a move to a higher-tier plan, and cross-selling, which recommends related products, are effective measures for raising the value per existing customer. They are easier to do at lower cost than new acquisition and let you grow revenue efficiently. However, forced price increases invite customer defection, so it is important to proceed in a way that matches the value provided.
Create triggers for repeat purchases with email, app notifications, membership programs, and the like, and increase usage frequency. By continuously providing touchpoints that bring customers back to mind, the number of transactions builds up.
What has a large impact on LTV is getting customers to keep using your product for a long time. Especially in subscriptions, improving the churn rate connects directly. By preparing onboarding and a support structure right after the start of use and resolving worries and dissatisfaction early, you connect to continued use.
Customers with deep attachment to a brand are more likely to repeat and bring in new customers through word of mouth. Through providing a customer experience (CX) that exceeds expectations and operating a fan community, building a relationship where you are chosen "because they like you" rather than chosen through price competition raises the floor of LTV.
Viewed in terms of profit, cost reduction is also a means of improving LTV. If you use MA (marketing automation) and CRM to streamline the nurturing and follow-up of prospective customers, you can deepen relationships while keeping the human costs of acquisition and retention down. Identifying and approaching high-quality (less likely to churn) customers also leads to improved LTV as a result.
When using LTV, it is effective to keep the following points in mind.
LTV (lifetime value) is a metric that grasps the value a customer brings to your company over the period of the relationship, on a cumulative basis that includes repeat purchases. Against the backdrop of rising new-acquisition costs and the spread of subscriptions, it has become established as a key marketing metric.
LTV can be used in a variety of decisions, such as ad budgets, investment decisions, and prioritizing customer segments. And you can grow it through measures such as upselling and cross-selling, increasing purchase frequency, improving churn rate, raising loyalty, and reducing costs. What matters is not to finish at calculating LTV, but to connect it to concrete measures and continuous verification. Centering on building long-term relationships with customers, let us raise our own LTV little by little.
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