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
Macroeconomics
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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