Why LTV Metrics Are Crucial for Your Marketing Strategy and How to Measure Them

There are enough abstracts at play when running an e-commerce business — marketing shouldn’t be one of them.

Evaluating your efforts is the best way to ensure you hit the return on investment you expect from a marketing strategy. This analysis empowers better decisions like:

• Where to reach the right audience
• How this audience responds to — and acts on — your message
• What keeps buyers coming back for more
  

Today’s data tools optimize this engagement cycle. But what you measure, and how you use those insights, isn’t just about prepping your next campaign. It all should support a sustainable profit strategy. That’s where lifetime value metrics (LTVs) come in.

Traditional, on-the-fly key performance indicators (KPIs) like sales revenue earned or click-through rates are important, but they tell just part of the story. These metrics offer only immediate feedback on outreach techniques. Successful e-commerce businesses look at how marketing efforts today affect their bottom line in the long run.

Lifetime value metrics evaluate how much an individual customer is worth to your business over time. Acquiring new leads is expensive — up to 25 times more costly than keeping current customers, according to Harvard Business Review. Understanding and leveraging LTV metrics will help your e-commerce store not only attract but also retain a crowd that keeps on buying.

Why Lifetime Value Metrics Matter

Research shows that increasing customer retention rates by 5% can boost profits by 25% to 95%. Hanging on to your shoppers is simply good business.

Focusing on short-term gains might even work against you. A study from Bain & Company found that for the average e-commerce business, a customer isn’t profitable until they’ve shopped at least four times on your site.

But the returns then explode from there, because repeat customers:

• Spend more across every category, making bigger and bigger purchases over time
• Tell their friends about your store, bringing in more business
• Are willing to buy across product categories, enabling more cross-selling opportunities
  

Many businesses turn to KPIs like churn rates to assess how well they sustain ongoing interest. But without extra context, you’re only getting a narrow perspective.

Lifetime value metrics add another dimension to these standard retention figures. They show how much a customer contributes to your business — but if you use the metrics wisely, you can also understand where and how your loyal base forms.

That knowledge enables better, results-oriented decisions — so you can build retention that accelerates profit over time.

How to Measure Your Customers’ LTV

At its core, a customer’s lifetime value is the amount of money they spend during their total time as your customer. This basic calculation gives you a snapshot into someone’s potential to generate profit — but it’s difficult to take action on this value alone.

With access to the right data, your LTVs uncover customer behavior patterns. Understanding your audience directs more effective marketing, retention efforts, and even product development decisions.

Let’s say you have two customers: Fred and Sally. Fred spotted your Facebook ad and made a $50 purchase. Sally spent just $25 in response to your Instagram campaign — but then returned to buy more products valued at $30 and $70, respectively.

At first glance, we know that Sally’s $125 LTV trumps Fred’s $50. But when applying these LTV metrics for marketing, you can also learn:

• What campaigns turn new customers into long-term buyers, like if you find that higher LTV rates align with seasonal sales
• Which channels — in this example, Instagram — effectively attract high-LTV consumers
• The products that bring in high-LTV customers — and what catches their eye after that first sale
• What marketing avenues work well together, like to what degree blog content or emails encouraged Sally’s repeat buying
  

Once you’ve identified these patterns, LTV metrics help you not only justify but also maximize your marketing spend. Armed with the knowledge of what works — and what's losing money — it's easier to make changes that close gaps.

Evaluate your marketing’s cost-effectiveness by:

• Assessing a campaign or channel’s lifetime return: the total profit you earn from a customer — including Sally’s purchases post-campaign and off-channel — compared to what you spent to first grab her attention
• Tracking this LTV against your customer acquisition cost (LTV:CAC): comparing what you spend to acquire customers against that channel or campaign's lifetime value

A good benchmark for this LTV:CAC ratio is 3:1 or better. This means you're netting at least three times what you spend to bring in a new customer.

Make Better Marketing Decisions With the Right Data

LTV metrics are simple in premise. But the most actionable, accurate insights come from a comprehensive look at all of your business analytics. That's not the kind of math you want to work through on a cocktail napkin.

Peel Insights does it all for you, collecting and monitoring more than 35 key e-commerce metrics and tracking how these figures interact. Instead of searching for the meaning behind individual KPIs, you get complete data you can actually use.

Try it for free to see where you can optimize business growth today, fueling tomorrow’s profits.