Does that make sense?
I believe the equation is:
Lifetime Value = Current + Potential Value
Let’s take web hosting for an example. Here at XenMedia, we have a hosting company that offers various options for business web hosting. The cheapest option is £3.49 per month. Not a lot of money in grand scheme things eh?
Well, let’s break the facts down a little just to give you an idea of LTV.
Now, this figure is based on them keeping the same level of hosting for the lifetime of the account. However, at some point, this client is going to want more disk space, ftp accounts, MySQL databases etc and will probably increase their spend with our company.
So you can have a client with an initial LTV of £204 which could easily rise to well over £1000.
Now, as a marketer, what you would do is take the average spend of your clients over their lifetime and use this as a base.
For example, say the average LTV is £500 (the amount they spend with us over 5 years), we can calculate that our costs for offering are services are about £50. They’re not, I’m just using this as an example. That means we’re left with a profit of £450.
Know Your LTV
With this valuable knowledge we can then calculate that we could probably afford spend over £200 on marketing costs to acquire our client, still leaving us with £250 profit. Do you see how this works.
Now, as you can appreciate, I’m using fictitious fiigures and to be honest, the LTV is probably a lot higher than this, but I hope this conveys the point.
Whilst your competition is penny pinching and cutting back on ad spend. By knowing your average LTV allows you to increase your ad spend. Even in tough times.