LTV

LTV, customer lifetime value, is how much profit a customer brings over the whole time they buy from you. It is the price of a customer over the years, and so it tells you how much you can afford to spend to win one. If your customers come back, this number matters more than any single sale.

Profit per deal is the revenue of won deals minus their direct costs, divided by their number. Purchases per customer is how many won deals one customer has on average over the whole time. In the CRM: the number of won deals divided by the number of distinct customers who have them. Multiply the two. Example (invented numbers): 1.4 purchases means that out of ten customers, four came back once more.

Purchases per customer: how many times a customer bought over the whole time.

Profit per deal $900, the customer bought 1.4 times: $1,260.

Recalculate LTV quarterly; repeat purchases take time. The owner reads it with the head of sales and with whoever looks after existing customers. Watch the trend over several quarters. One quarter on its own says little.

Two decisions hang on it: how much you can spend to win a customer, and whether work after the sale is worth paying for. If LTV is close to CAC, each new customer barely pays back. Example (invented numbers): an LTV of $1,260 against a CAC of about $833 leaves about $427 per customer over the whole time.

LTV builds on profit per deal and is read against CAC. Average deal size shows the revenue of one sale; LTV adds repeat purchases and takes off costs. Purchases per customer grow through work after the sale.

• Using revenue instead of profit. LTV here is profit, so multiply profit per deal. Average deal size does not belong in this formula.
• Counting purchases by contacts instead of customers. If one customer has several contacts or companies in the CRM, merge the duplicates first, or purchases per customer come out too low.
• Including customers who started last month. They have not had time to buy again. Count customers who have been with you for at least one full purchase cycle.
• Treating LTV as a promise. It describes the past. If you change the product or the price, recalculate it before you rely on it.

By Friday, the head of sales exports every won deal of the last two years from the CRM, with the customer name. Merge duplicate customers, then divide the number of deals by the number of customers. Multiply by last quarter's profit per deal and write the result next to CAC. If the two numbers are close, put work after the sale on next week's agenda. Before that meeting, the head of sales lists the three most common reasons customers bought a second time.

Which numbers to check every week, with one definition for the whole team.