How to use customer lifetime value?

Customer lifetime value (LTV) is arguably one of the best ways to think about individuals within your audience but is an often misunderstood metric and is not used in targeting. We want to change that, so we have broken down everything you need to know to get started. 

 

Firstly what is it? 

LTV is the total value that a customer brings over an extended period, rather than the value of each sale and transaction made by a customer.

Surprisingly, when put into practice, lifetime value should not be measured across the lifetime of the customer to be most effective. Rarely, if ever, will you have meaningful data for the entire lifetime of all your customers and it is this desire for perfection that means the metric is underused when it can still be extremely helpful. Instead, we recommend thinking of it as customer value over six months to a year e.g. what is the total revenue from that customer over the last six months.

Another perfectionist question with LTV is "what period should I use for my company?" The answer, like many things, will depend on the specifics of your business model, but your data will hold the answer if you analyse it. We recommend that, rather than trying to find the right answer, you think about the customer across different lengths of time. For example, it is better to look at customer value for both six months and one year than six months or one year. Yes, there is value in having “the perfect” definition but there is more in understanding that each period will show you and target different people. This will reveal more information about your customer (and be much faster), allowing you to make more informed decisions. 

Finally comes the question of returns, refunds etc. and whether you need to include that information. The more data you have, the clearer the picture; however, for most advertisers, including this is simply impractical. The end story will be very similar even without this data added in. With that in mind, it's better to have a metric than not have one, as long as everyone is clear about what is being included.  

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Where does it fit on my plans?  

LTV can enter your advertising easily at a few different points. The first is in reporting where it can run alongside your standard metrics to give you a clearer picture of how your campaigns are performing. However, the easiest place to see LTV in action is via the creation of custom audiences in social platforms by using the data you have.

Custom audiences (where you provide a list of users to Facebook - or another platform who meet your criteria) are a natural point to include LTV groups, predicted and current. Providing a better quality segment ensures targeting will perform better. 

 

Where can I get the data from / how do I do it? 

The data needed for LTV has never been more accessible. Google Analytics, once exported into Big Query, will have all the information you need to build current and predicted LTV audiences. 

You could build these yourself, with the help of a data scientist and a large amount of effort, or you could simply connect your Google Analytics data to our platform which was designed to do this (and is faster, easier and cheaper). The choice is yours! 

If you would like to know more about collecting Google Analytics data we recommend reading our article on how to get more value from GA4.

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