Improve customer service

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Focus on giving special attention to your most valuable customers. Never forget the practical Pareto principle: 20% of your customers generate 80% of your income.

Using LTV to identify your most valuable customers will help you decide where to direct your customer service resources.

Paying attention to your most valuable (and profitable) customers will help you increase margins, while fostering strong relationships through better service to your most important clinical nurse specialist email list segment.

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The role of LTV in a startup
One of the most valuable applications is using LTV to frame a better understanding of your customer acquisition cost (CAC).

Your LTV:CAC ratio reveals a lot about the health of your business model. Many startups and small businesses struggle to grow because their CAC is higher than their LTV.

Once you calculate your LTV, you can focus on optimizing this ratio, which ensures your business continues to grow at a healthy rate.

Without measuring LTV, a business could be spending too much to acquire customers whose lifetime value simply isn't worth the cost.

Once you've identified your most valuable group, you can focus on providing customer service tailored to their needs to ensure they stay as long-term customers.

How to calculate Lifetime Value or LTV?
Now that we know that LTV is integral to your business’s ability to grow , let’s talk about how you can calculate it.

Measuring LTV requires looking at customer lifetime length, retention rate, customer churn rate, and average profit margins per customer.

However, there are several different ways to calculate LTV, including the simple, traditional formulas we'll look at below.

LTV can also be historical or predictive depending on the data used.

Historical LTV is the sum of all the benefits from a customer's past purchases.

This number is based on existing customer data from a specific time period.

Predictive LTV allows you to project the amount of revenue a customer will generate for your business over the course of the customer relationship.

This is considered a more comprehensive method for evaluating this value.

The predictive model uses transaction history and behavioral patterns to determine a customer's current value and to predict how the customer's value will evolve over time.

As you collect more data to include in this calculation, the value will become more and more accurate.

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The Simple LTV formula

The most basic way to determine LTV is to add up the revenue earned from a customer (annual revenue multiplied by the average customer lifetime) minus the initial cost of acquiring them.

(Annual revenue per customer * Customer relationship in years) – Customer acquisition cost

Here's a quick example of the simple LTV formula:

Imagine a company generates $3,000 each year per customer with an average customer lifetime of 10 years and a CAC of $5,000 for each customer.