Lifetime Valueasas

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Contents

Introduction This sheet

Basic Model-Assumptions Inputs for basic LTV model

Basic Model-Calculations Output report for basic LTV model

Complex Model-Assumptions Inputs for complex LTV model

Complex Model-Calculations Outputs for complex LTV model

Overview

The LVC tool is designed to let the user estimate the cost of acquiring a customer and the NPV of that

customer’s business during his useful economic life. Two models are offered – a simple one that

looks at a single product and somewhat simplified assumptions, and a more complex model that

allows the user to examine multiple products with distinct customer loyalty and repurchase

characteristics.

The models assume that customer acquisition is done through a spending program that could include

advertisements, special discount coupons or giving out of free samples. The user must make some

assumptions about how much it costs the company to reach each potential customer as well as what

percentage of customers reached will make an initial purchase. If there are additional costs (such as

a rebate) that only apply to actual customers, those are also calculated. This provides a total cost per

acquired customer.

The customer value calculation is similar to a perpetuity function. At each potential repurchase period,

the user must estimate how many existing customers will continue to buy, a percentage known as

Retention Rate. After adjusting for price inflation, this gives us all the components we need for the

perpetuity formula. In the simple model the customer is considered to have an infinite economic life,

although this is not too great a distortion unless retention rates are extremely high. (Even at 80%

retention, a customer is almost 90% ‘used up’ after just ten years.)

In the complex model, the user can assign a specific useful economic life to a customer, set multiple

retention rates for different years, and look at the value of a customer for a company with multiple

products. The calculation page then separates the profitability of the customer on an annual basis and

by product, as well as breaking up customer present value by product.

Directions

For more detailed directions place your mouse above the red celltips located throughout the

tool. See this example -->

You may want to print these directions as a reference guide for this tool. You can do this by selecting

Print Sheet with Celltips from the HBS Menu

To start using the tool, remove the sample data from the tool using the Show/Hide Sample Data option

under the HBS Menu

Note About Using Internet Explorer

The default setting in Internet Explorer is to open these tools in the Explorer application instead

of Excel. We recommend against this and provide directions in the Help section of the HBS

Toolkit web site to change this default behavior.

HBS Menu

Show/Hide Sample Data: Displays or removes sample entries

Show Calculator: Launches Windows calculator

Show/Hide Celltips: Toggles in/out red Celltips in documented cells

Print Sheet with Celltips: Prints Celltip documentation on current sheet

Set Zoom: Provides quick access to 80%, 100%, and 125% zoom levels

Visit Web Links: Links to HBS Toolkit website, Toolkit Glossary, and Toolkit

Feedback, as well as HBS and HBS Publishing web sites

About HBS Toolkit: Launches the about box for the HBS Toolkit

Jon B. DeFriese MBA `00 and Chad Ellis, MBA `98 developed this software under the supervision of Professor

Steven Wheelwright as the basis for class discussion rather than to illustrate either the effective or ineffective

handling of an administrative situation.


Lifetime Customer Value Calculator INTRODUCTION

Assumptions

Time between purchases (years) 3

Retention Rate per Period 80%

Average Purchase Value 50.00$

Profit Margin 25%

Profit per Purchase 12.50$

Discount Rate per year 12%

Product Inflation per year 3%

Cost of Reaching a Potential Customer 0.50$

Response Rate 10%

Cost of Attracting a Customer 5.00$

Coupon or other one-off costs 8.00$

Total Customer Acquisition Cost 13.00$


Lifetime Customer Value Calculator BASIC MODEL -ASSUMPTIONS

Calculations

Years per Period 3

Retention Rate 80%

Inflation per Year 3%

Discount Rate per Year 12%

Change in value of customer purchase per period -13%

Discount Rate per Period 40%

Net Present Value of Customer Purchase Stream 23.55$

Cost of Acquiring a Customer 13.00$

Net Present Value of Acquiring a Customer 10.55$


Lifetime Customer Value Calculator BASIC MODEL - CALCULATIONS

Years of Customer Life

Annual Discount Rate 12%

Item 1 Item 2 Item 3

Initial Purchase Price 100.00$ 30.00$ 50.00$

Annual Product Inflation 3% 5% 3%

Margin per Product 20% 18% 22%

Retention Rate Year 1 75% 80% 90%

Retention Rate Later Yrs. 60% 65% 75%

Years between Purchase 3 1 2


Lifetime Customer Value Calculator COMPLEX MODEL - ASSUMPTIONS

Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Item 1 Item 2 Item 3

Year 1 100.00$ 30.00$ 50.00$ 20% 18% 22% 75% 80% 90% 100% 100% 100% 20.00$ 5.40$ 11.00$

Year 2 -$ 31.50$ -$ 20% 18% 22% 60% 65% 75% 75% 80% 90% -$ 4.54$ -$

Year 3 -$ 33.08$ 53.05$ 20% 18% 22% 60% 65% 75% 45% 52% 68% -$ 3.10$ 7.88$

Year 4 109.27$ 34.73$ -$ 20% 18% 22% 60% 65% 75% 27% 34% 51% 5.90$ 2.11$ -$

Year 5 -$ 36.47$ 56.28$ 20% 18% 22% 60% 65% 75% 16% 22% 38% -$ 1.44$ 4.70$

Year 6 -$ 38.29$ -$ 20% 18% 22% 60% 65% 75% 10% 14% 28% -$ 0.98$ -$

Year 7 119.41$ 40.20$ 59.70$ 20% 18% 22% 60% 65% 75% 6% 9% 21% 1.39$ 0.67$ 2.81$

Year 8 -$ 42.21$ -$ 20% 18% 22% 60% 65% 75% 3% 6% 16% -$ 0.46$ -$

Item 1 Item 2 Item 3

$22.24 $13.79 $19.36

Total NPV $55.39

Survival Rate Profit per Acquired Customer

Net Present Value

Value of Purchase Margin of Purchase Retention Rate


Lifetime Customer Value Calculator COMPLEX MODEL - CALCULATIONS

Documents

Lifetime Valueasas