Over the last couple of weeks, I’ve spoken to a handful of people in DTC who don’t talk about or skip over the topic of customer lifetime value (LTV). Digging deeper, I found out it’s because they either don’t know how to calculate LTV, or how to use it.
Well, let me fix that…
Firstly, LTV isn’t a meaningful metric until you look at it over fixed time period – such as a rolling 12 month window.
A simple way to calculate LTV (historical) is by multiplying the average order value by the average amount of purchases a customer makes in a 12 month period.
This should give you a good starting point.
You can refine this further by drilling the average order value down into new customer AOV and returning customer AOV and including this into your calculation.
LTV then becomes more powerful when you start to view and compare it by cohort:
- 12 month LTV for customers who first purchased in a specific month
- 12 month LTV for customers who included product X in their first purchase
- 12 month LTV for customers who were acquired by X channel
You can then identify which cohorts lead to the highest LTV and make informed decisions on which types of customers you should focus your acquisition and retention efforts on.
Calculating, recalculating and segmenting LTV manually can be pain in the backside – my suggestion would be to identify a specific LTV tool or app, find an analytics provider or build your own dashboards to help you do this. This will also allow you to improve your accuracy as you’ll be able to utilise all of customer data in your calculations.
In a nutshell, tracking LTV is a must-do for any eCommerce business.
By getting to calculate LTV and analysing it by cohort, you can make smart decisions about customer acquisition and retention – and grow your business.
Are you struggling to scale your DTC business and don’t know where to start?
Then it sounds like you need an eCommerce consultant to help you get started. Drop me a contact form and let’s have a conversation today!