1. What is Customer Lifetime Value (LTV)?

Customer Lifetime Value (LTV) represents the total revenue a business can expect from a single customer account throughout their relationship with the company. It helps businesses understand customer profitability and make informed decisions about marketing spend, customer acquisition, and retention strategies.

2. How Does the LTV Calculator Work?

The calculator uses the standard LTV formula:

Where:

• Average Purchase Value — The average amount spent per transaction
• Purchase Frequency — How often purchases occur per year
• Customer Lifespan — How long the average customer remains active (in years)

Explanation: This basic LTV calculation multiplies the average value of a customer's purchases by how often they make purchases and how long they remain a customer.

3. Importance of LTV Calculation

Details: Knowing your LTV helps determine how much you can spend to acquire a customer while remaining profitable. It's crucial for budgeting marketing spend, evaluating customer segments, and making strategic business decisions.

4. Using the Calculator

Tips: Enter the average purchase value in dollars, purchase frequency as transactions per year, and customer lifespan in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a good LTV to CAC (Customer Acquisition Cost) ratio?
A: Generally, LTV should be at least 3x CAC for a sustainable business model. Ratios below 1:1 mean you're spending more to acquire customers than they're worth.

Q2: How can I improve my LTV?
A: Strategies include increasing average order value, encouraging more frequent purchases, extending customer lifespan through retention efforts, and improving customer satisfaction.

Q3: Should I use gross or net profit in LTV calculations?
A: For most accurate results, use net profit rather than revenue. However, revenue-based LTV is simpler and still useful for comparative purposes.

Q4: How often should I calculate LTV?
A: Regularly monitor LTV - monthly or quarterly is common. More frequent calculations may be needed when testing new strategies or during rapid growth periods.

Q5: What are limitations of this simple LTV formula?
A: This basic formula doesn't account for customer churn rates, discount rates, or variable spending patterns. More complex models may be needed for precise forecasting.