The Lifetime Value is the net value of the income that a client generates for us during the time that they are our client .
This calculation is a forecast because a priori we cannot know how long a customer will stay with us, what their purchase frequency will be or how much they will spend on each of them.
How is the Lifetime Value calculated?
There are various formulas to calculate this value, depending on the number of variables that are measured, but the simplest is the following:
LTV= Average Spend x Acquisition Recurrence x Customer Life
That is to say: the average cost that the client makes in each purchase he makes from us, multiplied by recurrence of acquisition of our products during a year and multiplied by the life of the client (the number of years that he is our client).
For a more accurate result with this formula, the average customer spend should be net.
Obviously this KPI is very important for a business since the probability of selling to a potential client is usually between 5% and 20%, while this percentage rises to 60-70% when it comes to selling to a client who have already bought once .
Therefore, the cost of acquiring a customer (CAC) must be less than the lifetime value (LTV) , since it would cost us less to attract a customer than what we get from him.