Zach Oldham explains why Customer Lifetime Value is the metric that matters most for e-commerce. Divide total lifetime revenue by total customers to find it. Track three windows—lifetime, 12-month, and 3-month—to see how your marketing changes affect what each customer is worth.
Apple makes millions and millions of dollars off of you because of this one metric. At FlaxLabs, we track over 170 key metrics on a daily basis for our clients. However, there is one metric that we value more than any of them, and this metric is what has made Apple and other Fortune 500 companies trillions and trillions and trillions of dollars. When you're running a business, there are dozens of different metrics that you need to keep track of. All of these numbers can get incredibly overwhelming, and it's usually very difficult to figure out what's noise and what should actually be paid attention to. Let me save you some time and introduce you to a metric that is incredibly crucial. Customer lifetime value. This is also known as LTV. This is a number that shows you how much the average customer spends with you over the course of their lifetime. There is a simple and easy way to calculate LTV for your business. This should give you a strong picture of where your business stands today. To start, find the lifetime revenue of your business and find the lifetime number of total customers of your business. You're going to divide the lifetime revenue by the amount of lifetime customers or total customers of your business, and that is going to give you your lifetime value metric. This again tells you how much each customer is worth to your business. An important thing to keep in mind is as you make changes to your marketing strategies and your structure as a company, your lifetime value is going to change, and it's possible that lifetime value in the last month is actually higher than your lifetime value for the entire course of your business. And what I mean by that is it's possible that the amount that your customers have spent in the last month is actually more than they've spent on average all time because you might have found a way for customers to spend more with your business. Now, when I was first starting out running a marketing agency a few years ago, people would pay me between $20 and $50 for marketing packages. Now at Labs, they pay us up to 5 figures on a monthly basis to run their marketing. If I were to look at my total customer lifetime value, it's going to be relatively low compared to what our lifetime value is at Flax Labs specifically, where our customers or clients now are worth over $100,000. The reason that LTV is so important is because it gives you an idea of how much you can actually spend on your marketing. If you have a non-expensive consumable good like toothpaste, for example, without knowing your LTV, you might think that you only have $1 to $3 potentially to spend on your marketing because that's all the profit that you would make from each sale of a tube of toothpaste. However, once you discover that the customers you acquire are likely going to buy your product over and over again, you are now making almost residual profit off of those repeat orders. Instead of a new customer being worth just $4 or $5, the cost of a tube of toothpaste, now they're worth $10, $20, $30, $40, and the profit you're making is $20, $30, maybe $35. This allows you to spend more money on the initial purchase of the customer, knowing that when they start repeat purchasing, they will pay for themselves. Big brands know this incredibly well, and it drives most of their marketing efforts. Companies like Nike, Apple, or Lululemon will all spend a ton of money to acquire you as a customer for your first purchase. They know that once you are in their ecosystem, you are going to spend hundreds and hundreds hundreds and thousands of dollars on their products. Big brands will spend up to or even more than 3 times the amount that you spend on that initial purchase on getting you as a customer. So if you spend $100 on your first purchase, a big brand might be spending $500 to acquire you as a customer. Because your LTV is constantly changing and your LTV will be different depending on the time frame that you look at— for example, if you look at your LTV from this year versus your LTV or your customer value for last year, then you'll notice those numbers are different. For example, customers on average might have spent $200 with you this year versus the average customer spending $150 with you last year. Over time, your LTV typically goes up because your business is constantly changing. You need to be able to track the difference in this LTV as time passes. To start, it's a good idea to keep track of your lifetime LTV, a 12-month LTV, and a 3-month LTV. You can also call these customer values if it makes more sense to you. If you're a real numbers nerd like us at Labs, then you might want to keep track of LTV on a few other time frames, but those 3 will give you at least a better idea on how different changes to your website and your marketing can affect your lifetime value. I hope that if you're watching this video and you run some sort of business, that you are calculating your lifetime value as soon as possible, as it's a great metric and health check for understanding the current state of your If you're looking for more business and e-commerce tips, you can subscribe. And if you're running an e-commerce business that does at least $25,000 a month, you can book a call in with myself and my team and we'll brainstorm some ways that you can boost your LTV.
