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Lifetime value
Definition
Based on product usage, like frequency, & with available data on customer behavior, a company can almost accurately know how much revenue on average a user is generating for them. Beginning with the first interaction with the product and ending with the last. It's the smallest amount of money you anticipate making from each client or user.
How is it useful?
LTV shows how long a customer is loyal to the product. Depending on the LTV, a company can decide how big a marketing budget should be allotted or spent to acquire a new user(CAC). For startups, the LTV keeps fluctuating as they don’t have big historic data on their customer behavior.
Example
Measuring the number of times an average user might return & make a purchase on the platform, the LTV is calculated. Hence, the utility of the product plays a major role.
Twitter Blue gives a user an official blue tick mark ahead of their profile name. And it costs $8/month. After a year of running this program, Twitter will have enough data to classify how many users purchase the blue tick month after month or after what delay. They’ll also know the users that are dropping off. Based on this an LTV could be calculated.
Formula:
LTV= Avg. revenue per user X Customer lifetime