Calculating Lifetime Value – Why It’s Important and how To Do It

You’ve probably heard of Lifetime Value (LTV) before. A lot of organizations talk about LTV and it’s coming up a lot more often in discussions about marketing performance. So, what is it? And why is it so important these days?

LTV is a measure of the amount of money an organization has spent with you throughout their tenure as a customer. It’s that simple. Let’s use a couple examples.

Organization A has been a customer for 5 years and they have an annual recurring revenue (ARR) of $25,000.

Organization B has been a customer for 3 years and they have an ARR of $50,000.

Which organization has a higher LTV? Organization B does. They’re LTV is $150,000, while Organization A has a LTV of $125,000.

It’s a fairly simple calculation… but it can be more difficult if clients can have different purchase options and contract lengths. The more different products and services you offer, with different types of contracts can complicate this a bit. But ultimately, it all boils down to answering one question… “How much money has Customer XYZ brought to your organization?”

Why it’s Important to Calculate

Once you’re able to calculate LTV, it comes in super handy in a number of different situations.

We at Directive use a formula called LTV to CAC to calculate the performance of a specific marketing channel. That’s the LTV of a customer in relation to the cost to acquire that company. Using this metric, you can create a model that does a great job of measuring how profitable your marketing channels are.

But it doesn’t stop there. LTV can play a big role in helping identify your ideal customer profile (ICP) as well. You can use LTV to compare different industries or verticals to see which industry/vertical has the best value to your organization. You can use LTV to compare geographies or regions. You can use LTV to compare account size–by either revenue or number of employees.

There’s really no end to how you can use LTV to measure your organization’s performance.

How to Calculate LTV in Salesforce

Now that you know what it is and how to use it, let’s make sure you’re able to calculate it in a way that gives you a ton of reporting and measurement flexibility. Let’s get this calculated in Salesforce (SFDC). You can get this up and running in less than an hour.

We want to get this calculation on the Account object. We do this because all Opportunities in SFDC are automatically to Accounts. So, the Account object is the ideal place to total up all of your Opps. We’re going to use the below account as our test account. As you can see, this account has 3 Closed Won Opps, each with a different amount. We want a field on the Account object that totals up these Closed Won Opps, but excludes the Opp that’s in the “Id. Decision Makers” stage.

We’re going to go into the “Object Manager” section, which is in your “Setup”.

In there, navigate to the Account object, and then click on “Fields & Relationships”. Then, create a new field.

Create the new field as “Roll-Up Summary” field type, then click “Next”.

Name this field “Lifetime Value” or something along those lines. Give it a description and add some help text to ensure that users know what this field is. Then click “Next”.

Here, we want to set the “Summarized Object” to be the Opportunity object, so select “Opportunities” here. Next, select the “Roll-Up Type” to be “SUM”. And to the right of that, select the field you want to aggregate. Most of the time, this is going to be the “Amount” field, but you may use a custom field here that you want to aggregate instead. So, choose whichever field you want to aggregate.

Lastly, on this same screen, we need to ensure that we’re only pulling in Opportunities that are Closed Won. So, in the “Filter Criteria” section, select “Only records meeting certain criteria”.

That brings up a whole new section where we get to select our criteria. The field we want to select is the “Won” field. And we want that to equal “true”.

To confirm that you have this set properly, it should look like the image below. The only difference may be the field that you selected to aggregate.

If yours is ready to go, then click “Next”.

This is where you’re going to determine the field level security for this field. Make sure that it’s visible to the Profiles that you want to be able to see this. Note that this field will be “Read-Only” for all Profiles. This is correct, as this field should not be editable. Once you’re done selecting the Profiles, then click “Next”.

Now, select the page layouts that you want this to be visible on. You definitely want this to be visible for both Sales and Marketing. And probably other views as well. Once you’ve selected those, go ahead and click “Next”.

You’re done!! That’s it… you’ve created this field. Now, let’s go look at Edge Communications (our test account) to see if it’s working properly.

Our new “Lifetime Value” field shows a value of $185,000, which if we manually add up the value of the Closed Won Opps is correct.

Awesome!!!

Let’s See It In a Report

Okay, now that we have this field in place, and it looks like it’s working properly, let’s go see it in a report and see how we can use it.

Go create a report using the “Accounts” Report Type. Let’s make sure we select “All Accounts” and then set the time parameter to be “Created Date” and “All Time”. Then, let’s add another filter that the Lifetime Value field is greater than 0.

Once you have that in place, go over to your “Outline”. Add in a row grouping for something like Industry. And, make sure you add your new “Lifetime Value” field in the “Columns” section. When you add that, click on the field in the left-hand navigation and check the “Sum” and “Average” boxes. It should look like the below image.

Go ahead and click “Run”. You now have a report that shows you all Accounts that have a Lifetime Value, grouped by their Industry (or whichever field you selected), and show the total Lifetime Value for all Accounts in that Industry and the average Lifetime Value for all Accounts in that Industry.

If you’re satisfied with this report, create some new ones with new groupings for fields like “Lead Source”, “Country”, “Annual Revenue” or “# of Employees”.

Congratulations!! You’re now doing LTV calculations right in SFDC!! And that wasn’t painful at all.