What is Lifetime Value (LTV)
Every company should be tracking “customer lifetime value”, which is frequently abbreviated at LTV or CLV. Lifetime value is a critical metric that allows each organization to intelligently make key decisions commonly regarding new customer acquisition and customer retention. LTV is one of the best benchmarks used to assess profitability, sales & marketing, and customer experience.
LTV is the total amount of revenue that a particular customer will spend throughout their entire relationship with your brand on Amazon. If you know how much revenue each new customer is worth to your company, you can make decisions about how best to expand your business and improve your top and bottom line.
A lot of Amazon’s success can be attributed to its focus on leveraging data analysis and consumer insights to create personalized experiences for users. By surprising and delighting their customers with benefits and features such as same-day shipping and free returns, Amazon has built an extremely loyal customer base. Amazon has focused on offering amazing benefits to their Prime customers because these subscribers have a high LTV. “Brendan Mathews, a research analyst at Motley Fool has published his research on Amazon concluding that the average Prime subscriber has an LTV of $2283, more than twice the LTV of a non-subscriber.” Amazon invests in improving their customer experience because they understand the value of converting a customer into a repeat customer/subscriber. Knowing and tracking LTV allows you to make data-driven decisions regarding customer acquisition and retention.
Now that we’ve reviewed the importance of LTV, let’s dive deeper into understanding how it is calculated.
How LTV is Calculated
As a brand selling on Amazon, your goal should be to offer the best possible experience for your consumers. Calculating and tracking your LTV can help you understand whether or not you are doing so. LTV is a metric you can use to determine what investments you should be making into acquiring new customers and retaining existing customers.
LTV considers how much money a customer is spending rather than the number of items they are purchasing. Customers who frequently purchase high-priced items from your catalog will have a higher LTV than customers who purchase lower-priced items at the same frequency.
LTV has many slightly different definitions and methods of calculation. Common ways to calculate LTV include some use of the following metrics…
- Average Order Value Per Customer
- Average Order Frequency
- Average Profit Per Customer
- Expected Customer Lifespan
The formulas in calculating LTV range from complex to simple and vary from company to company. Whatever calculation you use, the most important thing is to consistently use the same formula to track LTV over time.
One simple formula for calculating LTV is:
Average Profit Per Customer * Expected Customer Lifespan
The lifetime value of your Amazon Store customer is calculated by estimating the profit that an Amazon customer brings to the company throughout their entire customer lifespan.
Automating LTV Calculation
For the savvier Amazon Seller, a comprehensive calculation is important. Metrics like purchase frequencies are often an integral part of a well-rounded formula most likely to yield a better result. However, monitoring and keeping track of multiple variables can be extremely time-consuming.
Envision Horizon uses our own Amazon analytics and diagnostic platform, myHorizons, to calculate and track a wide range of key metrics, including LTV. Customer Lifetime Value (LTV) is automatically calculated and presented to you in real-time under the sales dashboard alongside other relevant stats such as NTB sales and average purchase cycle. To access this report, log in to your myHorizons account and navigate to Sales>Sales by Date.
myHorizons can do the heavy lifting for you. Get valuable market data about your Amazon business that you can’t find anywhere else. Learn more here.
How to Use LTV to Make Data-Driven Decisions
LTV is a key metric every Amazon Seller should keep track of. The benefits of knowing and tracking your LTV are…
- Help identify the most profitable type of customer for your business
- Design data-driven customer loyalty programs
- Get insights into the strength of your relationship with your customers
- Compare your user acquisition cost to other channels
- Compare your user retention cost to other channels
Tracking and understanding your LTV can help you strike a balance between your short-term and long-term marketing goals. It is also a key metric to consider when investigating your return on your investment for customer acquisition and retention initiatives.