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What is LTV?

In recent years, the importance of customer relationship (CRM) and marketing automation (MA) has been attracting attention.

The LTV (Life Time Value) introduced here is one of the important indicators related to these new marketing methods.
Here, we will explain the meaning of LTV and its relationship with cross-selling and up-selling.

[What is LTV (Life Time Value)? ]

First of all, I will introduce the basic contents such as what the word LTV means and how it is calculated.

● LTV (Life Time Value) is an index that expresses customer production value

LTV stands for Life Time Value, which means “customer lifetime value” when translated into Japanese.
In other words, it is “the total revenue earned from the beginning of a transaction with one or one customer until the end of the transaction”.
LTV includes not only repeat purchases of the same services and products, but also purchases of related products and upgrades to higher plan services.

Originally, it was frequently used in subscription model businesses and SaaS (Softwear as a Service), and has attracted attention as an indicator useful for analyzing business continuity and growth potential.
Of course, even if it is not a subscription model, it will be a useful indicator for display if it is an industry that maintains a long-term relationship with customers.

●Calculation formula for LTV

In fact, there is not just one method for calculating LTV, and it varies depending on the industry and business model.
Here, we will introduce the simplest and most understandable ones for the subscription model and for general businesses that focus on intermittent one-off transactions.

 ・[For subscription model] LTV calculation formula

In a subscription model that expects continuous usage charges every month, LTV is calculated using the following formula.

LTV = [Average monthly transaction value per customer] x [Gross profit rate] x [Average duration]

For example, let’s say there is a business with an average monthly transaction amount of 10,000 yen, a gross profit margin of 50%, and an average duration of 36 months.

In that case, the LTV will be 10,000 x 0.5 x 36 = 180,000 yen.
That means you can expect $180,000 in revenue for each customer you acquire.

 ・ [For general business models] LTV calculation formula

On the other hand, in a general business model that is not specialized in subscriptions and is centered on one-off transactions, it is calculated with the following formula.

LTV = [Average purchase price] x [Gross profit rate] x [Average number of purchases (purchase frequency x duration)]

For example, let’s assume that the average purchase price is 5,000 yen, the gross profit rate is 20%, and one customer purchases twice a month on average for a year.
At that time, the LTV will be 5,000 x 0.2 x 24 = 24,000 yen.

[Why is LTV important in recent years? What is the background? ]

As explained, LTV is a metric that focuses on sales or revenue from a single unit of customers.
In other words, the point is that “improving LTV” has a strong nuance of “aiming to increase revenue from existing customers”.
Of course, there is no doubt that LTV will improve as new customers increase, but the meaning of “how to acquire new customers efficiently” is weak.
Why is LTV, which is slightly different from the conventional marketing concept, becoming important?
The background to this is thought to be the following two points.

 ・The cost of acquiring new customers increased as the market matured.

Due in part to the declining birthrate and aging population, the domestic market is experiencing an oversupply of goods and services, and price competition is becoming increasingly fierce.
As a result, the so-called “1:5 rule” shows that it costs about five times as much to acquire a new customer as it does to retain an existing one.
One of the major reasons why LTV has attracted attention is that the way companies deal with existing customers has come to affect the growth of companies.

 ・Need to shift to a method that responds to changes in purchasing behavior

In addition to the maturity of the market and the balance between supply and demand, the development of information technology has made customers more discerning.
It has become easier to compare various products and services, needs have become more diversified and subdivided than ever before, and demand for quality continues to rise.
We live in an age when a company cannot be evaluated highly unless it is a company that can focus and approach each existing customer, rather than marketing to an unspecified number of people who have not yet become customers.
The importance of LTV can be said to be proof that more and more companies are shifting to the optimal marketing method in response to changes in customer behavior.

[Increase in up-selling and cross-selling directly leads to improvement in LTV]

So, what measures are necessary to effectively improve LTV?
There is more than one way of thinking, but as you can see from the formula, it is essential to improve the average unit price of customers in order to improve LTV.
It is possible to simply reduce the cost of goods or increase the unit sales price by raising prices, but these are relatively difficult methods.
Most companies should already be considering cost cutting as much as possible, and there is a risk that raising prices will cause customers to leave or rebel.

Therefore, the first point to improve LTV is to increase the frequency of customer purchases.
Above all, if you can induce up-selling and cross-selling to existing customers, it will be the best method.
This is because if you can prepare an optimal lineup and successfully promote it to existing customers, you can improve your LTV without depriving your company of resources.

・Recommendation engine that promotes at the optimal timing is effective in improving LTV

Regardless of the genre or industry, it is extremely important to be able to present attractive offers to customers in the information gathering stage.
If PR can be done at the optimum timing with a high-performance AI-based recommendation engine, it is possible to improve LTV with less resources.
The withdrawal rate from corporate sites and landing pages will also decrease, and it will be a method of killing three birds with one stone, which will also lead to the acquisition of new customers.

[LTV is a notable indicator regardless of industry. Aim for improvement with the best tools]

LTV is an indicator that has been attracting attention with the development of subscription businesses and SaaS.

Now that the market has matured and customer behavior has changed, it is becoming more important for all businesses regardless of industry or industry.

If you have an attractive corporate site, landing page, etc., and if it is possible to introduce it, the recommendation engine can be the best method for improving LTV.
It is also attractive that it has excellent cost performance because it can realize high-performance customer approach by AI.
Consider the best tool for your company’s conditions and aim to improve LTV.


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