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.
Predicted lifetime value is how much you predict the customer will spend in the next six months or year.
The clear question then 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. This will reveal more information about your customer, 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.