The one number that changes how I think about every e-commerce business

One metric can tell me almost everything about the future of an ecommerce business. It tells me more about the marketing strategy that ROAS; more about the product performance than retention; and more about the financial viability than most predictive models.

But most new online sellers get it wrong.

That's lifetime value (LTV).It is how much revenue a customer gives you throughout their lifetime. A high LTV is indicative of a business with a loyal customer base: these businesses know that they can invest in their future because they know they will can increase revenue by adding new customers to existing ones. A low LTV means a business must replace old customers with new ones just to maintain the same revenue. One grows; the other stalls.

There are two main ways to increase LTV: keep more customers coming back and getting your customers to spend more. It's best to think of retention as a strategic aim and average purchase value as a tactical aim. If you have a customer that reliably spends £100 a year with you and then you suddenly upsell £50 worth of stuff that they don't really want or need and they then churn: you've messed up!

The core problem with LTV is that, unless you're a funeral director, you can't wait until your clients are dead to get a useful measurement. There are a few ways to deal with this: the first is to estimate LTV using models that forecast the average LTV across all customers. This is typically the most useful for long term forecasting. You can also calculate LTV to date. Whilst this is incredibly accurate it doesn't really give you much information to make decisions on. Finally, fixed period LTV is a compromise metric. You can accurately measure it and it gives you useful information however if the fixed period is too short it over prioritises upselling over retention. This is a good metric for understanding the value of acquiring new customers but a poor way of refining your product and retention strategy.

Generally speaking a business should use both a predicted LTV and a fixed term LTV in order to maximise value.

The true power of LTV comes when you calculate the LTV of different customer types. This allows you to target acquiring the demographic and behavioural profiles that actually make you the most money and identify the specific retention issues that are holding back your less valuable customer types. This is the core of intelligent decision making.

LTV is not a perfect metric and shouldn't really be treated as a target but can be a hugely powerful tool for optimising your marketing, retention and product development strategies.