Learn to interpret LTV by distinguishing revenue from contribution, stating costs and periods, using an example, and separating forecasts from observations.
Lifetime value, or LTV, describes value from a customer relationship; CLV is another common label. Calculations differ depending on whether they measure revenue or amounts remaining after costs.
Future estimates also differ from observed revenue. Define the period and included costs before comparing acquisition spending.
Do not compare revenue LTV and cost-adjusted LTV as equivalent figures. OpenStax describes forecast CLV as an estimate. (OpenStax: Marketing metrics)
State deducted costs and avoid treating revenue as profit available for acquisition.
In hypothetical monetary units, a purchase of 100 made three times annually for two years produces revenue of 600. This assumes unchanged price and frequency.
If 40% remains after per-sale costs, the contribution is 240. If acquisition and support costs are not deducted here, this differs from profit including those costs.
Record actual revenue, frequency, and costs over the observed period. For forecasts, state the basis for expected duration and frequency.
Use matching customer groups and cost definitions in acquisition evaluation. Avoid treating a small-sample forecast as a fixed spending limit.
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A: Specify whether the measure uses revenue or a cost-adjusted amount.
A: 100 times three annual purchases times two years equals 600.
A: The example excludes acquisition and support costs.
A: Label it a forecast and explain duration and frequency assumptions.
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