Wondering if you're paying too much to acquire Facebook and Instagram customers? Do you know how much a single customer is worth to your business?
In this article, you'll discover three ways to find your customer lifetime value (LTV) and learn how LTV can inform your marketing efforts.
How Establishing Customer Lifetime Value Improves Marketing Decisions
Your customer LTV is how much the average customer is worth to your business in the lifetime of their relationship with you. Lifetime, in this context, refers to the number of years you retain that customer. For example, your average customer might do business with you for 6 years and purchase $2,000 during that time.
Different audience niches often have different LTVs. Some customers will stick around longer, while others may regularly make purchases that have higher-than-average order values.
Your LTV is an essential metric, even if it's one that you need to track down instead of being readily available on an ads dashboard.
Only by understanding your LTV can you accurately assess the long-term ROI of your campaigns. It's also a crucial figure that you'll want to take into account when determining how much you can afford to spend to acquire a customer through paid platforms, including Facebook and Instagram ads and even referral marketing.
Businesses that have tight profit margins or typically see a higher customer acquisition cost may be able to spend more to acquire individual customers once they factor LTV into the equation instead of only the profit of the first sale.
Let's say you pay $8 per customer on Facebook ads and your average profit margin per order is $10. At first glance, it doesn't appear to leave a lot of room for revenue or growth.
However, when you factor in LTV, you may realize that your average customer will purchase 15 times on average, giving you $150 in sales for an $8 customer acquisition cost. That's a substantially larger ROI and may have you rethinking your Facebook and Instagram ads budget and any bidding minimums you have in place.
#1: How to Reveal Customer LTV With Facebook Analytics
While there are plenty of tools that promise to track and calculate LTV, some can be expensive. Fortunately, Facebook offers an LTV tool in their native analytics that's free.
To use Facebook's native LTV tool, you must meet the following criteria:
Because most businesses advertising on Facebook and Instagram already have the tracking pixel installed and purchase events tracked, this makes it an exceptionally accessible tool overall.
Keep in mind that calculating your customer LTV can be an involved process, requiring multiple calculations before you can arrive at a single LTV. You'll need to conduct these calculations for every audience segment you have if you want the most accurate results.
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Start by navigating to your Facebook Analytics. Then click on Activity > Lifetime Value in the navigation bar on the left.
This will open up your LTV dashboard.
From here, you can use the options at the top right of the screen to:
- View LTV for all users or paying customers.
- Assess LTV over different time periods, including weekly or monthly segments after the first event.
- View LTV since the original event you're tracking to see its impact over time.
Because Facebook's database allows for insight into user demographics and identity, you can segment LTV by age, gender, and approximate location.
Additionally, if you want to segment people by the Facebook and Instagram ads they clicked to come to your site or by the product they purchased, use filters to understand how those elements might have impacted your LTV. This may help you track offers, ads, and even products that result in higher-value customers with higher LTVs.
To add a filter, simply click Add Filter at the top of the screen and select your criteria.
Limitations to Facebook's Native LTV Tool
Overall, Facebook's native LTV tool is great, especially considering that it's free, accessible, and exceptionally easy to use.
That being said, there's a limitation to keep in mind.
Facebook Analytics data doesn't always align perfectly with off-platform data that you may get from your CRM or Google Analytics. Many marketers experience this even with conversion tracking cross-platform.
This is because it's based entirely on Facebook's pixel and doesn't take in data from other sources. Your CRM, on the other hand, may offer more accurate information overall, though it likely doesn't come with the convenient LTV calculations ready to view. For instance, when my business looked at average order value on Shopify, it showed $51.48. However, in Facebook Analytics, the average order value was $56.18 during the same time period.
Additionally, with the pending rollout of Apple's App Tracking Transparency update, it's possible this data might become more limited in its ability to accurately track a customer's LTV over time, as user tracking information may be significantly impaired for iOS mobile users.
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I strongly recommend watching your data closely over the next few months to see how your data and campaign optimization are affected. If there's a significant impact, Facebook's LTV tool may be more unreliable than it is now.
Overall, however, this is an exceptional tool that can provide valuable information that businesses can act on right away. Verify the data with your CRM to make sure everything checks out but you can use this data to look at your Facebook and Instagram campaigns and adjust your budget or bidding strategy as needed.
This tool is most valuable when used as a directional source of information as opposed to ironclad, 100% accurate data.
#2: Calculate Customer LTV Manually
You can also calculate LTV manually with a customer LTV formula. To arrive at this number, you'll need to perform several calculations.
Start by calculating your average purchase value, which is the average dollar amount of each purchase. To find this, divide total revenue in a set time period by the total number of purchases in that same time period.
Total revenue / Number of purchases = Average purchase value
Next, calculate the average purchase frequency rate, which tells you how often individual customers purchase from your business on average. To find this value, divide the number of purchases in a set time period by the number of unique customers who purchased in that same period.
Total number of purchases / Number of unique customers who made a purchase = Average purchase frequency rate
Now calculate your customer value. This tells you how much the average customer is worth to your business at any given point. You can find it by multiplying the average purchase value by the average purchase frequency rate.
Average purchase value x Average purchase frequency rate = Customer value
You also need to know the average customer lifespan, which tells you the average of how long customers actively purchase from your business. This is simply the mean of all of the years that customers purchase from you, which is information you can get from your CRM or sales platform.
The last step is to calculate your average customer LTV. To find this value, multiply average customer value by customer lifespan.
Average customer value x Customer lifespan = LTV
#3: How to Establish LTV via Online Calculators
You can also use an online calculator to quickly calculate your LTV.
Some of these tools, however, may not account for some metrics like purchase frequency or overall lifetime, and they all require more active input than Facebook's automated tool. You'll also need to continually assess LTV as your data changes over time.
Here are a few good options to check out:
Neatly has a free, on-page LTV calculating tool that requires you to add your average order value, purchase frequency, and customer acquisition cost.
WebFX has a free tool that takes all crucial metrics into account.
#4: Compare Your LTV to the Benchmark Ratio
What's considered a “good” LTV can be subjective so benchmarks listed online aren't always the most reliable. Factors like industry, business age, and business model can all result in wide fluctuations for the baseline LTV metric.
This is why it's so important to shoot for a target LTV based on your business's other metrics and existing performance. To assess whether your current customers have a solid LTV, you first need to know your customer acquisition cost (CAC).
You can find your CAC by viewing the data reported for your Facebook and Instagram ad campaigns. You can see the cost per action. For conversions, you can track “cost per unique add to cart” and “cost per purchase.” Choose the cost for your desired end goal.
Ideally, you want a 3:1 ratio in terms of LTV to your customer acquisition costs. In other words, you want to make at least $3 in gross profit (or have a $3 contribution margin) for every dollar you spend acquiring that customer.
If you're making under $3 in gross profit per $1 in ad spend, this can become expensive or unsustainable over time and prevent you from scaling. In this case, it may be advisable to either spend less on Facebook and Instagram ads in the meantime or find a way to increase LTV.
If you find that you're above the 3:1 ratio, you may want to consider investing more in new customer growth. This will help you continue to expand your customer base, potentially reach new audiences, and grow your business.
Calculating your LTV should be a central part of managing your Facebook and Instagram ad campaigns. It can help you attract the right high-value audiences for your businesses, while also being an important tool to accurately calculate ROI and what you can truly afford to spend on cost per action.
This information is valuable even outside of Facebook and Instagram ads, as it can give you a directional look at your LTV for your business overall. You can then compare your LTV to industry benchmarks or see if there's room for improvement.
Because Facebook's LTV tool is free, there's no downside to checking it out to see what information it can offer your business.
What do you think? Do you use Facebook's native LTV tool for your business? Please share your thoughts in the comments below.
More articles on Facebook ads:
- Discover how to set up the Facebook Conversions API so you can measure your Facebook and Instagram marketing activities.
- Find out how to create a custom report layout in Facebook Ads Manager.
- Learn how to identify ads you should stop spending money on.
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