LTV: Lifetime Customer Value

What is LTV? LTV: is an abbreviation for "Lifetime Value" and is an index that stands for "customer lifetime value". In recent years, many companies are paying attention to maintaining good relationships with customers whose needs have diversified.


LTV: Lifetime Customer Value

LTV is an abbreviation for "Lifetime Value" and stands for "customer lifetime value". It is an index that shows the amount of revenue the company has generated from the time a customer initiates a transaction to the end of the transaction.

Calculate the total amount of customer revenue using a fixed calculation method. Business-to-customer transactions are not always one-time transactions.

If a customer likes the product or service they purchased, you can expect them to continue to purchase the same or related products or grades.

The total sales per such customer is the LTV. In addition, customers with high "customer loyalty (attachment to products, services and companies)" generally tend to have high LTV.

For companies, LTV is an essential metric for important marketing strategies to acquire new customers and retain existing customers.

How is LTV calculated?

LTV calculation methods vary by industry and business model, but the most common calculation methods are:

[LTV = average customer unit price x rate of return x frequency of purchase x duration]. In addition, the calculation method that includes the cost required to acquire and retain customers is as follows.

[LTV = average customer unit price x win rate x purchase frequency x duration - (cost of acquiring new customers + cost of retaining existing customers)].

As a result of calculating these, if the LTV becomes negative, it can be judged that the business is not established. In that case, measures must be taken to improve the LTV.

LTV fund by attracting attention

In this article, we will present an overview of LTV, how to calculate it, the background that attracts attention, and how to improve LTV. Explain the points you want to consider when calculating and improving LTV.

The importance of retaining existing customers, the introduction of CRM and changes in marketing methods have influenced the LTV background gaining attention. Here we will discuss these reasons.

Increased importance of retaining existing customers

It is estimated that the cost of acquiring a new customer is five times higher than retaining an existing customer with the same revenue.

Therefore, maintaining good relationships with existing customers and having them become regular customers for products and services can generate lower costs and higher profits.

Under these circumstances, marketing is emphasized to build a good relationship with existing customers, and LTV, which can visualize this relationship numerically, is attracting attention.

LTV can be improved by introducing CRM

CRM (customer relationship management) refers to measures to create and maintain good customer relationships, or tools and systems to manage and analyze customer information.

The introduction of CRM facilitates the management and analysis of customer attributes and behavioral history.

By centralizing customer information, which until now could not be managed, marketing that is not based on experience and intuition has become possible. By responding appropriately to each customer, it is possible to increase customer satisfaction and loyalty, and improve LTV.

Marketing methods have changed

Digitalization in recent years has made it possible for customers to obtain a variety of information themselves. However, as a result, customer needs have diversified and conventional mass marketing aimed at all consumers has become obsolete.

In recent years, marketing has shifted towards one-to-one marketing, in which the optimal approach is adopted to suit each customer's needs.

In addition, the penetration of the "subscription model" is also believed to be related to LTV improvement.

One-to-one marketing is especially important for subscription business models. Due to these changes in marketing methods, LTV is attracting even more attention.

How to increase LTV?

You can see what you need to do to increase your LTV by looking at the elements of the LTV formula. Specifically, customer unit price, purchase frequency, duration, etc. By increasing these factors, you can expect an increase in LTV. Here, we will explain how to improve LTV based on these factors.

Increase the unit price

One quick way to improve LTV is to increase the unit price of the product or service itself. However, price increases for products and services are a touchy subject for customers.

For example, if a customer cites "cheap" as a reason for buying a product or service, it is possible that a price increase will cause the customer to opt for a competitor's product.

Therefore, when it comes to raising the unit price, you need to conduct a thorough analysis to avoid losing customers. If your analysis concludes that your customers will understand, do it.

On the other hand, one method is to increase profitability by reducing costs without increasing the unit prices of products and services.

Upsell and cross-sell

In addition to increasing the unit price of the product or service itself, there are other ways to increase the unit price per customer through "upselling" and "cross-selling."

Upselling is the practice of offering a higher priced product to a customer who has already purchased your product. Cross-selling, on the other hand, is a technique for getting customers who are considering buying one product to buy a set of other products.

By encouraging purchases in this way, the purchase amount increases and the customer's unit price increases. But most importantly, don't try too hard.

The point is always to explain and make proposals from the customer's point of view, as there is a risk of losing customers to hard sells.

Encourage more frequent purchases

Even if the purchase amount is low at a given time, it is possible to increase the purchase amount by increasing the frequency of purchase. Regular purchases lead to higher unit prices for the customer.

For that reason, proper customer follow-up is important. Specifically, it would be good to do something like "reminder email delivery".

By sending reminder emails when it is time to replace products and services that customers have purchased, we encourage them to consider additional purchases.

Email delivery is an important measure to avoid switching to other companies' products and to maintain customer relationships.

Increasing loyalty

There is a close relationship between LTV and customer loyalty, and increasing the number of very loyal customers is directly related to improving LTV. This is because loyal customers are not only regular buyers of products and services, but may also recommend them to others.

Specific ways to increase loyalty are "offer benefits only to existing customers" and "enhance brand equity." For example, the former includes the provision of points programs and the granting of services.

In the latter case, measures such as cleaning up the corporate website and developing products that are highly valued by society are effective. By distributing messages about these efforts and conveying "something unique to this company," you will have a link to your company, products and services.

The key to improving LTV is to turn customers into fans

The key to improving LTV is good customer relationships. As customers become fans of your company, you can expect a significant increase in LTV.

Communication is essential to building good customer relationships. As a result, the role of contact centers that directly contact customers is gaining attention.

If you can provide good customer service in the contact center, you can expect the customer to become a fan and there is a chance that they will advertise to others. On the other hand, if you make a mistake in customer service, you cannot expect future relationships and there is a risk of word of mouth.

For these reasons, contact centers have a significant impact on customer relationships. The key to improving LTV is customer success metrics that proactively provide information to customers.

Increase your LTV by making your customers successful in your contact center. In addition, LTV and customer loyalty are closely related, and an increase in loyalty leads to an increase in LTV.

LTV is attracting increasing attention due to the growing importance of retaining existing customers for companies, changes in marketing methods and easier customer management due to the introduction of CRM.

To increase LTV, it is important to increase the unit price of products, which is an element of the LTV calculation formula, implement upselling and cross-selling, and follow up to increase purchase frequency.

The important thing in improving LTV is to make customers "fans," and contact centers that enable direct communication play an important role.

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