Predicted lifetime value
Predicted Lifetime Value (pLTV) is an estimation of the future net profit from a customer throughout their lifetime relationship with a business.
Predicted Lifetime Value (pLTV) is a comprehensive view of how valuable a customer will be to a business over the course of the entire life of their relationship. It goes beyond just the immediate transaction and seeks to predict the total revenue a business can reasonably expect from a single customer account. It takes into account not just a customer’s purchase history, but also their costs of acquisition, their expected future purchases, their loyalty and other behaviors, as well as scheduled or expected churn.
Formula
The pLTV can be calculated using the following formula: pLTV = (Average purchase value X Average purchase frequency rate) X (Average customer lifespan - customer acquisition cost - maintenance cost) For simplicity, it can also be seen as: pLTV = Gross margin % * (1 / churn rate)
Example
Example: If a customer usually spends $100 annually on your products, and they shop with you for 10 years, their pLTV would equal $1,000.
Why is pLTV important?
Calculating the Predicted Lifetime Value of a customer helps businesses make important decisions about sales, marketing, product development, and customer support. With this metric, businesses can determine how much money they are willing to spend on acquiring new customers and how much repeat business they can expect from certain segments of their customers.
Which factors impact pLTV?
There are numerous strategies to improve pLTV:
- Increasing the average purchase value by upselling and cross-selling
- Reducing the churn rate by improving customer service and customer experience
- Increasing repeat business through effective retention strategies
- Reducing costs of customer acquisition and maintenance.
How can pLTV be improved?
Factors that can impact pLTV include customer satisfaction, product quality, brand reputation and loyalty, purchase frequency, customer churn rate, and the cost of customer acquisition and retention.
What is pLTV's relationship with other metrics?
pLTV is directly linked with key ecommerce metrics such as churn rate, customer acquisition cost (CAC), customer retention rate, and average order value (AOV). A decrease in churn or CAC can lead to an increase in pLTV, and so can an increase in customer retention rate or AOV.
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