Lifetime Value and Setting a Marketing Budget
Calculating the lifetime value (LTV) of a customer is a critical step in setting a marketing budget that enables your business to scale effectively. LTV represents the total revenue a customer is expected to generate for your business over the entire duration of their relationship with you.
By understanding the LTV, you can allocate an appropriate marketing budget to acquire and retain customers profitably. Here’s a step-by-step process to calculate LTV and use it to set a marketing budget:
Step 1: Calculate Average Purchase Value (APV):
APV =
Total Revenue /
Total Number of Customers
APF =
Total Number of Purchases /
Total Number of Customers
Step 2: Calculate Average Purchase Frequency (APF):
Step 3: Calculate Customer Lifespan (CL):
CL =
Average Customer Retention Period (in months or years)
LTV =
APV x APF x CL
Step 4: Calculate Customer Lifetime Value (LTV):
Now that you have the APV, APF, and CL, you can calculate the LTV using the formula:
Step 5: Set Marketing Budget:
Once you have calculated the average lifetime value of your customers, you can use it to set a marketing budget that enables your service-based business to scale.
Here are some ways to leverage your LTV to profitably market your business:
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Customer Acquisition Cost (CAC):
Calculate the average cost to acquire a new customer. This includes all marketing and sales expenses related to acquiring new customers, plus any related onboarding costs.
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LTV to CAC Ratio:
Ideally, the LTV should be higher than the CAC. A healthy ratio for most businesses would typically be 3:1 or higher. This ensures that the revenue generated from a customer exceeds the cost of acquiring them.
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Budget Allocation:
Set aside a portion of the LTV for customer acquisition costs while leaving enough margin for profitability. The allocated budget should align with your growth goals and market conditions. For faster growth, allocate a higher proportion of the LTV on marketing and outbound sales activities.
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Testing and Optimization:
Allocate a portion of the budget to test and optimise different marketing channels and strategies. Continuously monitor the performance of each channel and adjust the budget allocation accordingly.
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Customer Retention:
Remember that retaining existing customers is often more cost-effective than acquiring new ones. Allocate resources to customer retention strategies to maximise the LTV of your customer base.
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Scaling Responsibly:
As your business scales, continuously reassess and adjust your marketing budget based on actual results and performance. Scaling should be done responsibly to ensure long-term sustainability and profitability.
By calculating the LTV and setting a marketing budget based on this value, you are well positioned to make informed decisions, optimise marketing efforts, and achieve sustainable growth.
Remember that these calculations are based on assumptions and historical data, so regularly updating and refining the LTV calculation is essential as your business evolves and market conditions change.
Allocating your marketing budget
Once you’ve got your LTV and can make informed decisions on your marketing budget, the next step is to assess your marketing activities based on the parameters that align with your business objectives and tailor your marketing plan according.
If that’s an area you’d like some assistance with, our team at Vizzably would love to help you review your options and create a clear strategy for the growth of your business.
Want some help?
How’d you go working out your LTV? If you’ve got some questions about this or are keen to see what you can do with your marketing budget, our team are here to help.
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