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Compute Lifetime Value of a Customer (LTV)

LTV as Scorecard, Why it’s such a good metric:

• Measures value contribution to a business

• Direct business decisions and operations

• Takes a long view and is comprehensive

• Adjusts for risk and timing of profits (CFt)

Economic vs. Accounting Profit

• Recognizes there is an opp. Cost whenever we invest in a business venture.

• Focuses on Value Creation based on:
o After-tax Profits adjusted for the cost of capital used to generate them.

Computing the LV of a Customer

Step 1: forecast after-tax profits over the lifetime of a customer

Step 2: Determine discount rate of cost of capital

Step 3: Calculate Net Present Value (NPV) of CFt over customer lifetime

Step 4: Divide NPV by the number of customers acquired

Explicit Forecast Period
CF1 / (1+r) + CF2 / (1+r)2 … CFt / (1+r)t

Continuing Value
[CFt(1+g) / (r-g) / (1+r)]

G= sustainable longtime growth

Forecasting Customer Cash Flows

Step 1: Approximate Customer Life Span in Years.
Longer is better!

Step 2: Determine the Billing Cycle (when cash is received)
Days – Weeks – Months – Years

Step 3: Develop a Theory
Industry Projections
Company Positioning
Individual Consumer Behavior
Company Historical Data
Marketing Effort

Become a Learning Organization

Step 5: Line-by-line forecast from income and balance sheet


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