19.2. Understanding Value Metrics

Value is a two-way street. The customer value proposition is comprised of the advantages that our product has over other products. Customer Lifetime Value (LTV) is the concept of using a customer's purchase history to predict how much she will spend over the entire time she remains a customer.

The lifetime of a customer is an expected retention rate based on historical averages. Value represents all the revenue from a single customer over a period of years less the cost to acquire and serve that customer. Besides retention rate, other factors such as referral rates and spending rates are used. As discussed in Chapter 17, LTV is the expected profit from a customer over the number of years the customer remains a customer.

The formula can become very complicated, and there can be concerns about accurately capturing all the possible variables. For this reason, it's often recommended that you worry about trends in LTV rather than the absolute score. If you always calculate your LTV in the same way, then you can tell whether you're making progress (or losing ground), even if the precise LTV value isn't perfect.

Okay, we've finished a complete project and measured and learned from our results. The next step is to start all over again.