Customer lifetime value and its connection to business

In today's business environment, any company seeking growth and stable profits must closely monitor how customer interactions affect profitability. One of the key indicators that reflects a customer's value to a company is customer lifetime value (LTV).

The LTV metric helps businesses:

• predict the profitability and effectiveness of marketing investments;
• determine how many resources to spend on attracting and retaining customers;
• Optimize engagement strategies, increasing average check size and repeat sales.

In this article, we will discuss what LTV is, how to calculate it correctly, which payment solutions help improve it, how to increase customer profit, and how Tranzzo helps businesses with these issues.

Customer Lifetime Value (LTV) is the net profit that a customer generates over the entire period of their life cycle with the company.

There are popular synonyms for this term: CLV (Customer Life-Time Value) and LTV (Lifetime Value), which essentially mean the same thing. Understanding this indicator helps to assess how profitable a business is at the launch stage.

Why measure LTV?

• Strategic decision-making: LTV knowledge allows you to determine which customer segments generate the most revenue.
• Marketing optimization: the ratio of LTV to customer acquisition cost (CAC) helps evaluate the effectiveness of marketing campaigns.
• Customer retention: High LTV indicates customer loyalty and willingness to make repeat purchases.

Examples of LTV calculation in different areas

• eCommerce business: LTV depends on the average check and purchase frequency. For example, if the average check = $50, the customer buys 5 times a year for 3 years, LTV = 50 × 5 × 3 = $750.
• SaaS model: LTV is determined based on the monthly subscription fee and the duration of the subscription. For a $20 per month subscription for 24 months, LTV = 20 × 24 = $480.
• Retail and offline stores: repeat purchases, average check, and frequency of visits are taken into account.
• Marketplaces and subscription services: LTV is generated through transaction activity, additional purchases, and loyalty programs.

Thus, LTV for business allows you to make informed decisions about investments, marketing, and payment solutions.

👉 Learn more about “Best Customer Retention Strategies”

The calculation of LTV can be simple or more complex, depending on the needs of the business. There are several approaches that allow you to accurately assess customer value and plan marketing and payment strategies.

LTV formula No. 1. Traditional and simplest

This option is suitable for a quick LTV assessment without complex calculations. It allows you to quickly get an idea of the overall value of a customer to the business, but does not take into account complex aspects such as seasonality, different customer segments, or changes in the average check over time.

Example: average monthly income = $100, average retention period = 12 months:

LTV = 100 × 12 = $1,200

Formula No. 2. Historical LTV or ARPU

This formula allows you to determine the average customer value based on historical data. It is useful for analyzing the effectiveness of marketing campaigns and assessing the profitability of different customer segments.

Example: total profit for the quarter = $50,000, number of customers = 200:

ARPU = 50,000 ÷ 200 = $250

Formula No. 3. Detailed (for segment analysis)

This approach allows you to estimate LTV for individual customer segments, taking into account marginality and churn. It is especially useful for eCommerce and SaaS models, where detailing by customer type is important.

Example: average check = $50, purchase frequency = 5 times per year, gross margin = 40%, churn rate = 20%:

LTV = 50 × 5 × 0.4 × (1 ÷ 0.2) = $500

Examples of formula application

• eCommerce: LTV is calculated based on average check, purchase frequency, and the impact of promotional campaigns.
• SaaS: LTV is generated through subscriptions, additional modules, and duration of use.
• Marketplaces: LTV takes into account repeat transactions, conversion into additional purchases, average check, and return rate.

Therefore, these calculations help plan methods for improving LTV and implementing effective payment instruments for LTV that influence customer retention.

Which payment solutions really affect LTV increase?

1. Payment automation and recurring payments
   The ability to set up automatic payments for subscriptions or services reduces the risk of customer churn and increases retention rates.
2. Multi-currency and contactless payments
   Support for different currencies and modern payment methods increases user convenience, which improves the user experience.
3. Integration with CRM and trigger messages
   Payment reminders, personalized offers, and discounts help customers avoid missed transactions, increasing LTV.
4. Payment gateways and payment processing
   Fast and reliable transactions reduce the likelihood of customer abandonment due to technical issues.
5. Financial analytics
   Detailed transaction reports enable you to identify customer behavior and develop strategies to increase LTV.

👉 Learn more about secure payment system integration in our article “How to switch to a modern payment system without interrupting your business.”

Tranzzo offers comprehensive solutions that help businesses increase LTV through:

• Payment automation and recurring debits
• Support for multiple currencies and payment methods
• Reliable payment processing and flexible routing rules

Case study

One of Tranzzo's clients, a large eCommerce business, integrated recurring payments and multi-currency gateways. Results after 6 months:

• the average check increased by 12%;
• the frequency of purchases increased by 18%;
• Customer LTV increased by 25%, which had a positive impact on the company's financial performance.

This case study confirms that the right payment solutions directly impact customer profitability, reduce churn, and increase the effectiveness of marketing spend.

Payment solutions directly affect customer lifetime value.

• Payment automation and recurring debits increase retention rates
• Multi-currency and modern payment methods increase the average check
• CRM integration and trigger messages reduce customer churn
• Financial analytics helps you make informed business decisions

The use of modern payment instruments, such as Tranzzo, allows businesses to effectively increase LTV, increase customer profits, and ensure stable company growth.