What is Customer Lifetime Value (LTV) and Why is it important?
The customer lifetime value (LTV), is the total estimated revenue a store earns over the lifetime of their relationship with a single customer. LTV gives a single view to your ecommerce data by normalizing the sales journeys to either inform of your success or failure.
By calculating LTV on its own, the metric gives you an outlook on how well a store retains valuable customers, increases revenue from less valuable customers, and surfaces ways to improve the overall customer buying experience. Depending on your products, LTV should inform how much you should spend on customer acquisition, through the metric of Customer Acquisition Cost (CAC).
How can you use CAC with LTV? What benefit would it give you?
LTV will not be able to provide details of whether the store is growing or slowing down unless paired with CAC. If your CAC is higher than your LTV, it suggests you're losing money for every customer acquired. If your LTV is higher than your CAC, it suggests that you may be achieving a good retention rate when compared to the cost to acquire the customer.
A healthy LTV to CAC ratio is 3:1, this suggests the value of your customers should be three times more than the cost of acquiring them. If the ratio is 1:1, it suggests that you may not be making any profit from your customers as they are only generating as much profit as you're spending on ad spend to acquire them. A higher ratio of 5:1, suggests you're spending too little on advertising and may see a reduction in your LTV as buying cycles end for your current cohort.