Marketing
LTV (Lifetime Value)
LTV (Lifetime Value) is the lifetime value of a customer, that is, the total profit a company makes from a single customer over the entire period of their relationship, from the first purchase to the last. This metric helps to understand how profitable it is to work with each customer and how to plan the expenses for acquiring new ones.
What it shows
LTV reflects the total amount of money a customer will spend on the company's products or services from the first purchase to the last.
Why calculate it
Understanding LTV allows a business to optimize marketing strategies, evaluate the effectiveness of advertising campaigns, and determine how much can be spent on acquiring new customers to make it profitable.
How to calculate LTV
To calculate LTV, you need to know the revenue from one person (ARPU) and the amounts spent on acquiring (CAC) and retaining (CRR) them.
ARPU (average revenue per user) — the average revenue from one buyer. To calculate it, you need to divide the total revenue for a specific period by the number of people who made a purchase during that period.
CAC (customer acquisition cost) — the cost of acquiring one user. To find out, you need to divide the advertising expenses by the number of new users.
CRR (customer retention rate) — the proportion of people who use the company's goods and services in a specific period. To calculate CRR, you need to subtract the number of new customers from the total number of customers at the end of the period. After that, divide the resulting number by the number of users at the beginning of the period and multiply by 100%.
When you have ARPU, CAC, and CRR, you can use the formula and calculate lifetime value:
LTV = Revenue over the entire «lifetime» of the customer − Costs of acquiring and retaining them
Let's calculate with an example.
Given: an online store of office equipment and consumables.
A customer placed their first order for 15,000. Acquiring them cost 1,000, and the cost of goods was 11,000.
Later, they bought consumables for 400. The cost of retaining them was 60 ₽, and the materials themselves cost 50.
Let's calculate the revenue the customer brought when they placed the first order. To do this, we subtract the cost of goods (11,000) and acquisition costs (1,000) from the average check of 15,000. We get 3,000.
Let's estimate how much money the person brought when they made the second purchase. By analogy with the first order, we subtract the cost of goods (50) and retention costs (60) from the average check of 400. It turns out to be 290.
Let's see what total revenue the online store received for both orders. We add 290 to 3,000 and get 3,290 from one customer. This is how you can calculate the profit after subsequent purchases made by the customer.
CIR (Cost-income ratio)
CIR (Cost/Income Ratio) - is a metric that reflects business operational efficiency. It is calculated as the ratio of operating expenses to operating income. The lower the CIR, the higher the efficiency.
How to calculate CIR:
CIR = (Total Costs / Total Revenue).
Example:
If a company's total costs are 100,000 USD and total revenue is 200,000 USD, then CIR = 100,000 / 200,000 = 0.5. This means that for every 50 USD in costs, the company generates 100 USD in revenue, which is a good result.
Why this is an important metric
By analyzing CIR, you can determine how efficiently a company spends its resources on acquiring and servicing customers.
The optimal CIR in online business is a metric that reflects the efficiency of resource utilization. Striving to reduce CIR is a key factor in increasing profitability and ensuring sustainable business growth.
For a successful online business, the CIR should be below 1, for example, 0.75, which means that for every 0.75 USD in costs, there is 1 USD in revenue.
How to improve CIR:
Reducing Costs
- Optimizing marketing campaigns to attract more customers at a lower cost.
- Improving the efficiency of operational processes to reduce customer service expenses.
- Automating processes to minimize manual labor and lower costs.
Increasing Revenue
- Increasing the average order value by offering additional products or services.
- Improving website conversion rates so that more visitors become buyers.
- Enhancing customer loyalty to encourage repeat purchases.
What is Due diligence?
Due diligence — a comprehensive review of a business or asset prior to a major transaction (purchase, investment) to identify all possible legal, financial, tax, and reputational risks. Essentially, it is an in-depth analysis that allows for obtaining the most complete and objective information about the target in order to make a well-considered decision and minimize potential losses.
What happens during the process?
- Experts (lawyers, financial professionals, auditors) examine all aspects of the company's operations:
Financial condition: analyze financial statements, verify debts and assets. - Legal aspects: review the legality of operations, the presence of litigation, and ownership rights to assets.
- Tax review: analyze tax returns and potential risks of tax claims.
- Reputation: verify the reliability and transparency of the company.
- Other: depending on the target, this may include technical, environmental, or marketing assessments.
Why is this needed?
- Risk reduction: identifies potential problems that could lead to financial losses.
- Valuation: helps to understand the true value of the target and negotiate the transaction price.
- Informed decision: provides a complete picture of the business or asset, allowing for a well-considered decision on the feasibility of the transaction.
- Deal preparation: can assist in negotiations and preparation for selling the company or attracting investments.