What is lifetime value (LTV)? …and how it relates to retail

Do you need to know what is lifetime value? We talk through the definiton of lifetime value, its importance and how its used in retail.

So if you talk to someone in CRM long enough, you will eventually ask yourself this question: what is Lifetime value? Anyone who is strong in this space will obsess over LTV – it’s the metric that if you can get it up, it will change your business forever.

The definition of life time value is the average revenue that a customer will generate throughout their lifetime as a customer. Why is it important? If you have a hundred thousand customers, each worth a lifetime value of £100, then there is £10 million of revenue there. Compare that to a lifetime value of £125 (25% more) – that adds £2.5 million to the coffers.

The most important part of that is generally, that revenue improves margin without the incremental cost of acquiring an additional 25,000 customers (at a lifetime value of £100). But there is more to it:

  • You can often predict what the LTV of a customer is by their first behaviours. For example
    • If they do a big purchase in the first order, they are likely to come back and buy more
    • If the customer come back and purchases again a second time, the probability that they purchase again increases again
  • Higher value customers are generally more satisfied with your product and service – so providing great service helps increase value
  • Your biggest customers are generally advocates too

How does retail affect lifetime value?

It’s generally accepted that people who have a positive experience in a retail environment (ie instore), there is a higher average order value, satisfaction and lifetime value. Providing a positive retail experience therefore is a hugely important factor in improving the customer value.

When customers do not come into the store, the logic follows that the value of the customer declines. Customers miss out on the interaction, immersion and brand experience. These 3 factors are crucial to improving conversion, and as a result customer value.

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