Understanding Product LTV

Maximizing profit per customer is essential to achieving sustainable growth for your brand. To measure your success, it's important to monitor your customers' Lifetime Value (LTV), which indicates how valuable a customer is to your brand over their lifetime. But knowing your customers' LTV is just the first step; identifying the factors that lead to high or low LTVs is equally important. One key factor is the customer's very first purchase—especially the first product they buy. Let's explore how to identify true magnets for high-quality customers.

Why the First Purchase Matters

The first product a customer buys from your brand will set the tone for the entire relationship. Imagine that your best-selling product is attracting loads of new customers, but is being purchased mostly by one-time buyers - definitely problematic and likely correlated. Even worse, if that product also comes with a high return rate. Not only are you not making money from those customers, you are wasting a significant portion of your marketing budget. To avoid this scenario, we strongly recommend analyzing the LTV of your customers based on the first product they purchased.

As an example, meet Kaya. She has become a true fan of your products, and with an LTV of $293, she ranks in the top 10% of your customers. Understanding her purchase behavior is incredibly insightful for identifying what drives her loyalty. By examining her product journey, we see that her first order was the Exfoliating Hand Wash.

Now it's interesting to understand if this is a pattern for all high LTV customers, or just her. So next, let's consider all customers who ordered the Exfoliating Hand Wash in their first order - to understand if this product attracts high LTV customers in general.

How Product LTV is Calculated

The good news is that your RetentionX account comes pre-loaded with these insights. Under All Products, you'll find all the metrics you need to understand the performance of your products, including their impact on LTV. Of course, you'll also find the same KPIs for All Variants, All Categories, and All Brands.




To understand the impact of your products on LTV, RetentionX identifies all customers whose first order included the product in question and analyzes their LTV—regardless of which additional or subsequent products contributed to it.

LTV = ∑ Net Revenue - ∑ COGS

The following two metrics are calculated based on this:

• LTV of New Customers
  The average lifetime value of all customers who purchased the product with their first order.
  
  Let's look at the LTV of the product Exfoliating Hand Wash:
  After identifying all customers who started their journey with this product, we have the following set of customers and their LTV:
  
  

  Customer ID

  LTV

  First Product Purchased

  17643903	$196.5
  19345204	$204.8
  18903185	$153.7
  18903161	$293.2
  19057902	$112.6
  19917610	$72.1

  
  The average LTV of new customers who purchase the Exfoliating Hand Wash is calculated by summing all LTVs of these customers and dividing by the sample size:
  
  ($196.5 + $204.8 + $153.7 + $98.8 + $112.6 + $72.1) / 6 = $172.15
  
  

Of course, using the current lifetime values of your customers can distort the analysis depending on when the product was first sold. For example, the LTV of a product launched one year ago may naturally be lower than that of a product launched five years ago - simply because customers have had more time to shop again and grow their LTV. This is where LTV 1 Year comes in!

• LTV 1 Year of New Customers
  The average lifetime value after the first year for customers who purchased the product with their first order.
  
  
  
  Looking at Kaya again, we wouldn’t use her current LTV to determine the product’s 1-year LTV but would only consider her value within the first year. By consistently using the same time period and only including customers who have completed that period, we can achieve comparability across all products.
  
  

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