What is Lifetime Value or LTV?

Lifetime Value is the net value of the income a client generates for us during the time he is our client.

This video will help explain the concept:

This calculation is a forecast because a priori we cannot know how long a customer will stay with us, what their purchase frequency will be, or how much they will spend on each purchase.

How is Lifetime Value calculated?

There are different formulas to calculate this value, depending on the amount of variables that are measured, but the simplest one is the following

LTV= Average Expenditure x Recurrence Acquisition x Lifetime

In other words: the average expenditure that the customer makes on each purchase from us, multiplied by the recurrence of acquisition of our products during one year and multiplied by the life of the customer (the number of years that he is our customer).

To obtain a more exact result with this formula, the average expense of the client should be net.

Obviously this KPI is very important for a business since the probability of selling to a potential customer is usually between 5% and 20%, while this percentage rises to 60-70% when it comes to selling to a customer who has already bought once.

Therefore, the cost of acquiring a client (CAC) must be lower than the lifetime value (LTV), as it would be costing us less to capture a client than we do to get it.