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.