What Is Lifetime Value (LTV)? Definition, Examples, & Formula

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Lifetime Value (LTV) is a measure of the average revenue you generate from each of your customers over a given time period.

In this article, we’ll dive into everything you need to know about LTV.

My name is Connor Gillivan. I’m an Entrepreneur and an Owner of AccountsBalance, EcomBalance, and Outsource School.

Since 2009, I’ve built 8+ companies to 6, 7, and 8 figures with an exit in 2019.

Lifetime value (LTV) has been a financial metric that I’ve always tracked and I highly encourage you to as well.

Here’s what we’ll cover:

What Is Lifetime Value (LTV)?
Why Is Lifetime Value (LTV) Important?
How Do You Calculate Lifetime Value (LTV)?
Lifetime Value Example #1: Marketing Agency
Lifetime Value Example #2: SAAS Company
Lifetime Value (LTV) Example #3: Bookkeeping Firm
5 Ways to Improve Your Lifetime Value (LTV)

Let’s dive into it!

What Is Lifetime Value (LTV)?

Simply put, LTV is the total amount of revenue a customer generates for your agency over the course of their relationship with you.

It’s important to note that LTV is not a static number and can change over time.

By improving your customer experience and increasing customer retention, you can increase your LTV.

Conversely, if your customer retention rates drop, your LTV will decrease.

Why Is Lifetime Value (LTV) Important?

Here are some key reasons why LTV is important:

Helps You Make Better Business Decisions: Knowing your LTV helps you make informed decisions about your marketing, sales, and customer retention efforts. By understanding how much revenue a customer will generate for your agency over time, you can determine how much you can afford to spend to acquire new customers and retain existing ones. This information is essential when making decisions about how to allocate your marketing budget and resources.
Increases Profitability: By maximizing your LTV, you can increase the profitability of your agency. If you know that a customer is likely to spend a certain amount of money with you over the course of their relationship with your agency, you can focus on retaining that customer and upselling them additional services or products. This helps to increase the average value of each customer and can lead to a significant boost in profitability.
Encourages Customer Retention: When you know the value of a customer over their lifetime, you are more likely to focus on retaining them for as long as possible. This can be achieved by providing excellent customer service, personalized experiences, and creating loyalty programs that encourage repeat business. By focusing on customer retention, you can increase your LTV and create a more stable and predictable revenue stream for your agency.
Attracts Investors: If you’re looking to raise capital or sell your agency, having a high LTV can be a valuable asset. Investors and potential buyers are often more interested in businesses that have a predictable and sustainable revenue stream. A high LTV indicates that your agency has a strong customer base and is likely to generate consistent revenue over time, which can make your business more attractive to investors.

How Do You Calculate Lifetime Value (LTV)?

There are a few different methods you can use to calculate LTV, but the basic formula is:

LTV = (Average Value of a Sale) x (Number of Repeat Transactions) x (Average Retention Time)

Let’s break down each component of the formula:

Average Value of a Sale: This refers to the average amount of money a customer spends with your agency in a single transaction. To calculate this, you can take the total revenue from your agency over a certain period (e.g. a year) and divide it by the total number of transactions during that period. For example, if your agency generated $500,000 in revenue from 1,000 transactions in a year, your average value of a sale would be $500.
Number of Repeat Transactions: This refers to the number of times a customer is likely to make a purchase from your agency over the course of their relationship with you. To calculate this, you can look at your historical customer data and determine how often customers make repeat purchases. For example, if you find that on average, a customer makes 3 purchases from your agency over 2 years, your number of repeat transactions would be 3.
Average Retention Time: This refers to the average length of time a customer stays with your agency before they stop doing business with you. To calculate this, you can look at your historical customer data and determine how long customers typically stay with your agency. For example, if you find that on average, a customer stays with your agency for 2 years, your average retention time would be 2 years.

Once you have these three pieces of information, you can plug them into the formula to calculate your LTV.

Using the example numbers we’ve been working with, the calculation would look like this:

LTV = $500 (average value of a sale) x 3 (number of repeat transactions) x 2 (average retention time) = $3,000

So in this example, the LTV for a customer would be $3,000.

This means that over the course of their relationship with your agency, you can expect them to generate $3,000 in revenue for you.

Lifetime Value Example #1: Marketing Agency

Let’s take a look at an example of how to calculate LTV for a marketing agency.

Assume that our agency offers digital marketing services, such as SEO, PPC, and social media management. Our average monthly retainer fee per client is $2,500, and we have found that our clients typically stay with us for an average of 24 months.

To calculate the LTV for a client, we can use the following formula:

LTV = (Average Monthly Revenue per Client) x (Number of Repeat Transactions) x (Average Retention Time)

In our example, the calculation would look like this:

LTV = $2,500 (average monthly revenue per client) x 24 (number of repeat transactions) = $60,000

So the LTV for a client would be $60,000. This means that over the course of their relationship with our agency, we can expect them to generate $60,000 in revenue for us.

Lifetime Value Example #2: SAAS Company

Let’s take a look at an example of how to calculate LTV for a Software as a Service (SAAS) company.

Assume that our SAAS company offers a project management tool for small businesses. Our monthly subscription fee is $50 per user, and we have found that our customers typically stay with us for an average of 12 months.

To calculate the LTV for a customer, we can use the following formula:

LTV = (Average Monthly Revenue per Customer) x (Number of Repeat Transactions) x (Average Retention Time)

In our example, the calculation would look like this:

LTV = $50 (average monthly revenue per customer) x 12 (number of repeat transactions) = $600

So the LTV for a customer would be $600. This means that over the course of their relationship with our SAAS company, we can expect them to generate $600 in revenue for us.

Lifetime Value (LTV) Example #3: Bookkeeping Firm

Assume that our bookkeeping firm offers monthly bookkeeping services to small businesses. Our average monthly fee per client is $1,000, and we have found that our clients typically stay with us for an average of 36 months.

To calculate the LTV for a client, we can use the following formula:

LTV = (Average Monthly Revenue per Client) x (Number of Repeat Transactions) x (Average Retention Time)

In our example, the calculation would look like this:

LTV = $1,000 (average monthly revenue per client) x 36 (number of repeat transactions) = $36,000

So the LTV for a client would be $36,000. This means that over the course of their relationship with our bookkeeping firm, we can expect them to generate $36,000 in revenue for us.

5 Ways to Improve Your Lifetime Value (LTV)

Here are five ways to improve your Lifetime Value (LTV):

Upsell and Cross-Sell: Offer additional products or services that complement what your customers have already purchased. For example, if you run a marketing agency, you might offer social media advertising services to a customer who has already engaged your team for SEO services. Upselling and cross-selling can increase the average revenue per customer and therefore increase the LTV.
Improve Customer Retention: Focus on keeping your customers satisfied and loyal. This can be achieved through excellent customer service, personalized communications, and a user-friendly experience. By increasing customer retention, you can increase the average retention time and therefore increase the LTV.
Increase Repeat Transactions: Encourage customers to purchase from you again and again. This can be achieved through loyalty programs, exclusive discounts, or personalized recommendations. By increasing the number of repeat transactions, you can increase the LTV.
Optimize Pricing Strategy: Set prices that are fair and competitive, while still allowing for a healthy profit margin. Be mindful of how price changes may affect customer retention and repeat transactions, and adjust your pricing strategy accordingly.
Invest in Customer Acquisition: Attract new customers through targeted advertising, social media marketing, and other strategies. By acquiring more customers, you can increase the number of repeat transactions and therefore increase the LTV.

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