This episode cuts through the noise to explain why Customer Lifetime Value (LTV) is one of the most critical metrics for any e-commerce business. Alex Hormozi breaks down three practical, back-of-the-napkin methods to calculate LTV, demonstrating how understanding this metric enables better strategic decisions around customer acquisition spend, growth projections, and identifying key levers for scaling your business.
Key takeaways
Calculate LTV using three methods: total lifetime sales divided by total lifetime customers (underestimates growing businesses, but gives a baseline), average monthly price divided by churn rate (useful for recurring revenue models), and sales velocity (average monthly revenue divided by average new sales per month, assuming stagnation).
Recognize that LTV directly impacts your ability to profitably acquire customers and scale; a higher LTV allows for greater ad spend and sustained growth. Focus on improving LTV to avoid getting squeezed in the $3-$10M revenue range.
Identify your business's hypothetical maximum revenue (cap rate) by understanding your LTV, churn, and sales velocity. This reveals whether you are growing, shrinking, or stagnant and highlights necessary changes (e.g., increase sales, raise prices, reduce churn).
Prioritize reducing churn, as even small improvements (e.g., from 20% to 10%) can dramatically increase LTV and unlock significant growth potential.
Use these LTV calculations for high-level directional math and decision-making, rather than precise accounting. The goal is to understand the implications of LTV on business growth and identify improvement areas.
Watch the YouTube video of this episode HERE
"You will know and understand what your cap rate or your hypothetical max is for your business simply by doing the math." Today, Alex (@AlexHormozi) breaks down three primary methods for calculating customer Lifetime Value (LTV) — lifetime earnings, churn rate, and sales velocity — and their impact on strategic business decisions. The discussion emphasizes the importance of LTV in projecting business growth, enhancing customer acquisition strategies, and improving profitability, making it a must-listen for businesses aiming to optimize their growth trajectory.
Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.
Timestamps:
(0:54) - Three different ways to calculate LTV
(1:21) - The significance of LTV in business growth
(2:19) - Calculating LTV based on churn
(4:23) - Calculating LTV based on sales velocity
(6:19) - The impact of LTV on business decisions
(10:18) - Strategic business decisions based on LTV
(12:23) - Conclusion: The power of LTV in business scaling
Follow Alex Hormozi’s Socials:
LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition
(This episode is a re-run. Original airdate was on May 19, 2022)
What does this episode say about customer retention?
Calculate LTV using three methods: total lifetime sales divided by total lifetime customers (underestimates growing businesses, but gives a baseline), average monthly price divided by churn rate (useful for recurring revenue models), and sales velocity (average monthly revenue divided by average new sales per month, assuming stagnation).
What does this episode say about finance & fundraising?
Recognize that LTV directly impacts your ability to profitably acquire customers and scale; a higher LTV allows for greater ad spend and sustained growth. Focus on improving LTV to avoid getting squeezed in the $3-$10M revenue range.
What does this episode say about analytics & attribution?
Identify your business's hypothetical maximum revenue (cap rate) by understanding your LTV, churn, and sales velocity. This reveals whether you are growing, shrinking, or stagnant and highlights necessary changes (e.g., increase sales, raise prices, reduce churn).
What does this episode say about founder & leadership?
Prioritize reducing churn, as even small improvements (e.g., from 20% to 10%) can dramatically increase LTV and unlock significant growth potential.
What does this episode say about customer retention?
Use these LTV calculations for high-level directional math and decision-making, rather than precise accounting. The goal is to understand the implications of LTV on business growth and identify improvement areas.
