Lifetime value (LTV) is the total revenue that a customer spent on a business in its lifespan. It is also known as Customer Lifetime Value (CLV). The calculation of LTV is very important to estimate the economic condition and profit of a business. Lifetime Value is a key component to determine the market value of a company. As with each new customer, the revenue increases so it can give a clear view of the value of each customer. Customer Acquisition Cost (CAC) is the amount you invest to get a new customer. If your lifetime value is greater than CAC then it means that you are getting more revenue as compared to the cost that you are spending to get new customers. So, for the establishment of your business, Customer Acquisition Value (CAC) should be less than the Customer Lifetime Value (LTV).
How to measure LTV?
Customer Lifetime Value is not just limited to the relationship of a customer and company until the time of purchase, but it is the long-term relationship, determined by how much revenue was curated by one customer over a number of touchpoints. There are many ways to calculate LTV but it can be calculated through this simple formula given below.
Lifetime Value (LTV)= Customer Revenue Over a Given Period ÷ Churn Rate of a Company Over a Given Period
‘Customer revenue over a given period’ means how much revenue you get from a customer in a specific period, such as 15 days or one month etc. Whereas, churn rate is the percentage of customers who leave you after a specific period.
Suppose that if your customer revenue is $4,000K and the churn rate is 100% then the total LTV can be calculated as:
Lifetime Value (LTV) = 4,000K ÷ 100
Lifetime Value (LTV) = £40K
In the monthly calculation of LTV, if the values of both revenues and churn rates are greater, there will be very little variation in LTV. If your LTV is less than the CAC, then you must think about where you should put effort to avoid a loss in business. You can easily grow your business to try and keep your LTV higher than your CAC.
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It is the most complex process an early-stage company must go through. A channel is not just about the name of providing a platform to sell. The confusion is common. A channel where you position the product might take you to the platform where you sell, but not all the time. In other words, it represents the medium where you can get the greatest audience reach, potentially the cheapest way to have huge visibility. An example could be TikTok, an amazing channel for specific types of products for video materials and most important catchy viral trends. The platform where you sell could be Shopify.Assessing which channel works best for your company and particular product is a complete process or a series of steps that follow to achieve business goals.Choosing the best channel refers to the selection of a platform that fulfills all the requirements to meet the expectations of the business owner. It starts with assessing the customer personal, social, and demographic characteristics which feed into your decision, but it then expands to data you have available from tests across multiple channels and data you enhance to get better insights.In is quite normal to change strategies depending on specific product ranges, countries and even type of content to enable you to optimise the cost of acquisition.You might want to consider the following while you search for the best channel for your product:Cost-effectivenessCost-effectiveness is a way to determine that whether this channel will prove economically viable for your business or not? Does it require more resources or money to maintain or run the activity on a particular channel, or creating the content?Some businesses in the venture capital space at times run campaigns at a loss, they pay more for a lead than they get in Lifetime Value. It is acceptable if you are just launching and creating a buzz about your company.The same strategy could be completely unsustainable in the long run.Ease of accessThe best channel provides you the ease of accessing the products for customers. It enables you to be first to the audience, building loyalty, a community feeling. They buy your content and values as much as your product.If you are selling to the gaming community, you may consider YouTube Gaming or Twitch. If you are targeting young professional mothers as an audience, you may consider Facebook or LinkedIn.Every customer profile will demand a different approach. Ask yourself where your ideal client is spending their time, and how much of it. Run tests, validate your assumptions. Learn and test some more.Marketing and CreativesThe most expensive element if find the right channel is creating engaging content to promote your brand. It is much easier to get virality with video than any other form of content, yet the production usually sets a high bar which start-ups cannot meet.It is easier for established brands to get mass publicity just by virtual of having budgets dedicated to curating and producing the best channel appropriate content.In early-stage, founders are faced with challenges, and you always must compromise on key elements, select the marketing and creative collateral that are within the means given. Building on what works at one level is the best way to progress towards more expensive strategies, potentially involving TV ads, videos, and celebrity endorsements.Small businesses face substantial hurdles while opting for a good channel for products. While choosing the best channel proper guidance is very necessary. You must keep in view all the above factors to select a beneficial channel. Improving on this process will enable you to find faster, cheaper ways to reach your audience, improve your brand recognition and increase conversion.
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