Knowing this key metric will be very helpful in creating a marketing budget.
The LTV is a figure you’ll want to know in order to calculate how much you should spend to acquire a new customer. The formula for figuring the Lifetime Value (LTV) of a customer is:
(Frequency of Sale) X (Duration of Loyalty) X (Gross Profit per Sale) = LTV.
Assume the average duration of loyalty for your business is 10 years. If over that ‘lifetime’ the average customer spends $8,000 then it’s easy to see that spending more on getting a new customer is money well spent by the return on that investment. On the other hand, if your LTV is two years and $200, then you need to do two things: carefully target your new customer initiatives and begin working to improve the average duration of loyalty. This can be done by making sure you are selling what your customers want at prices they want to pay, delivering exemplary customer service and keeping customers informed of sales, new products and special values.