“LTV (lifetime value)” appears in many business situations, such as “analyzing and improving LTV,” “maximizing LTV,” and “securing customers with high LTV.”
This time, we will explain the meaning of “LTV (lifetime value)” and how to analyze and improve it.
Meaning of “LTV (lifetime value)”
According to Daijirin,
LTV
(Life Time Value) is “an indicator of the profit that can be obtained from a single customer over the long term.”
Generally referred to as “customer lifetime value,” it analyzes and calculates the current value of a single customer based on the expected profits that the company will bring to the company in the future.
The name LTV gives the impression that it is a new business term, but in fact, this concept is the “royal road” in the business field and is already common knowledge.
If you say “good customer” in commonly used Japanese, it might make sense.
Simply put, they are repeat customers who continue to purchase products and services over and over again, contributing to sales.
In a market that has become a red ocean, it can be said that it is extremely difficult to develop new customers.
Therefore, a marketing strategy is needed from the viewpoint of how to maintain existing customers, that is, how to increase repeat customers who will contribute to sales.
That strategy can be considered the starting point for LTV.
How to analyze and improve “LTV (lifetime value)”?
However, as mentioned above, if it ends with the perspective of “increasing repeat customers,” it is no different from existing marketing strategies.
The important point is how to analyze and utilize the LTV concept.
First, let’s take a look at how to calculate LTV as a prerequisite for its use.
There are various methods, but the simplest calculation method is as follows.
“Profits and costs generated by a single customer in the future”
Specifically, it is as follows.
(Purchase unit price x number of purchases x number of years of purchase) – (new customer acquisition cost + customer retention cost)
For example, suppose that company A, a business partner, has information (data) that the unit price is 30,000 yen and the purchasing cycle is 4 times in 1 year, with each purchase cycle lasting approximately 5 years.
(Here, for the sake of simplicity, we will ignore gross profit margin etc.)
The expected profit that Company A will bring is 30,000 yen x 4 times x 5 years = 600,000 yen.
Next, assume that the cost of acquiring new customers is 200,000 yen and the cost of retaining customers is 40,000 yen.
Taking these into account, Company A’s final LTV is as follows.
600,000 yen – (200,000 yen + 40,000 yen) = 360,000 yen (Company A’s LTV)
There are two ways to analyze and improve LTV: increase profits or reduce costs.
1. Increase profits
- increase purchasing price
- Increase the number of purchases
- Extend the number of years of purchase
2. Lower costs
- Lower new customer acquisition costs
- Lower customer retention costs
The idea of LTV is to adjust the balance between these two.
For example, let’s say the cost of implementing a marketing strategy is 50,000 yen per customer.
When deciding whether to spend an additional 50,000 yen on customer retention costs,
“How much can the purchasing price increase?”
“How much will the number of purchases increase?”
“How much will the number of years of purchase increase?”
All you have to do is compare and analyze these three.
If the unit purchase price increases by only 5,000 yen, we cannot afford to increase customer retention costs.
However, if, for example, the purchasing period increases by five years and the LTV doubles, the probability of implementing a new marketing strategy will increase.
In this way, LTV analysis can also be used when determining marketing methods.
Additionally, you can use these LTVs to analyze and categorize your customers and take different approaches depending on their level.
Furthermore, in the sales field, LTV can be considered as the axis when making decisions such as discounts.
LTV can be used as a criterion in various situations.
Transition to a business model aimed at improving “LTV (lifetime value)”
Of course, it is important to focus on LTV and develop marketing strategies, but management no longer stops there; it continues to evolve.
This is because the movement to rethink the business model itself is accelerating.
One option is to shift your business model to a subscription model.
To begin with, the very concept of purchasing products and services is tied to the idea of “number of purchases.”
In the case of a subscription model, if customers continue to feel the value of the service, they have the potential to build semi-permanent relationships.
As a turning point in analyzing and deciding whether or not to migrate, the perspective of LTV becomes important.
In addition to accurately understanding the content of LTV, we will continue to evolve, including the development of marketing strategies and new business models based on LTV.
What is needed is bold reform that looks to the future without fear of change.
.png)
summary
◆LTV (Life Time Value) is an index of profit earned from a single customer over the long term.
-with-sql.jpg)
◆Use LTV as a criterion for implementing new marketing measures.
◆One option is to shift to a new business model based on LTV.