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Strategy
CUSTOMER LIFETIME VALUE
Strategy
What is Customer Lifetime Value?
Roughly defined, LTV is the projected revenue that a customer will
generate duri...
Strategy
Profit Based Lifetime Value
The same example, if we bring in average profit margin it can show us
the average pro...
Strategy
Traditional Lifetime Value
We can use a 3rd calculation that integrates customer retention rate and
discounted ca...
Strategy
Traditional Lifetime Value
LTV = m(r/1 + i – r)
5382.94(0.75/1 + 0.1 – 0.75)
= £11,535
Average Lifetime Value = a...
Strategy
Why is lifetime value so important?
Lifetime value is important:
It helps us to analyse how much one customer is ...
Strategy
Why is lifetime value so important?
THE MORE WE CAN INVEST TO ACQUIRE A
CUSTOMER, THE MORE CUSTOMERS WE CAN
ACQUI...
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Lifetime Value Calculation

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How to calculate Lifetime Value

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Lifetime Value Calculation

  1. 1. Strategy CUSTOMER LIFETIME VALUE
  2. 2. Strategy What is Customer Lifetime Value? Roughly defined, LTV is the projected revenue that a customer will generate during their lifetime. E.g. 5 customers go to Starbucks, on average spend £5.90 per visit Average number of trips for the 5 is 4.2 per week Average customer value per week = £24.30 Average customer lifespan = 20 years Simple Lifetime value = £25,272
  3. 3. Strategy Profit Based Lifetime Value The same example, if we bring in average profit margin it can show us the average profit per customer over the lifespan. Starbucks profit margin = 21.3% Using previous figures: 52(5.90 x 4.2 x 0.213) x 20 = £5,489
  4. 4. Strategy Traditional Lifetime Value We can use a 3rd calculation that integrates customer retention rate and discounted cash flow interest rate (value of future monies now) Starbucks profit margin = 21.3% m = Customer lifetime value (simple method) x profit margin: £5382.94 (average gross margin per customer lifespan) r = Customer retention rate: 75% i = discounted cash flow interest rate: 10% LTV = m(r/1 + i – r)
  5. 5. Strategy Traditional Lifetime Value LTV = m(r/1 + i – r) 5382.94(0.75/1 + 0.1 – 0.75) = £11,535 Average Lifetime Value = average of all 3 calculations = £14,099
  6. 6. Strategy Why is lifetime value so important? Lifetime value is important: It helps us to analyse how much one customer is worth It shows us how much we can invest to acquire that one customer. This is customer acquisition cost. (CAC) In our example, we have to spend less than £14,099 or else we would technically be losing money straight away. The more we can invest to acquire a customer, the more customers we can acquire, and the more we can grow relative to our competitors. We can effectively price our competitors out of the market.
  7. 7. Strategy Why is lifetime value so important? THE MORE WE CAN INVEST TO ACQUIRE A CUSTOMER, THE MORE CUSTOMERS WE CAN ACQUIRE, AND THE MORE WE CAN GROW RELATIVE TO OUR COMPETITORS. WE CAN EFFECTIVELY PRICE OUR COMPETITORS OUT OF THE MARKET.

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