Lifetime Value (LTV) is a metric that’s used by organizations to measure how much a business could, in theory, make in terms of revenue from the average customer over time. This ‘value’ can be critical in helping organizational leaders to determine high-level decisions, such as how much money to allocate to marketing and which customer groups for sales teams to focus on.
Given the differences in products, services, costs, purchase patterns, purchase volume, and other personal factors among customers, however, LTV can be difficult to figure out; it’s something that can be calculated in many ways.
A good starting point is to look at total average revenue and total average profit per customer and factor in other metrics such as gross margin and operating expenses. Don’t forget that different types of customers can have different LTVs, particularly when you have lots of pricing levels. In such a case, it makes sense to calculate LTVs based on customer groups. LTV is always closely related to Customer Acquisition Costs (CAC) and are often calculated together.