LifeTime Value Workbook

InstructionsDavid Hughes: http://www.nonlineblogging.comhttp://twitter.com/_davidhughesAvinash Kaushik: http://www.kaushik.net/avinashhttp://twitter.com/avinashkaushik

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Life Time Value is a simple concept but it can get pretty complicated, as we explain our blog post. This workbook has been created to help you understand some of the basic principles, but you'll need to adapt it to your company's specific needs. We hope that you enjoy playing around with it. It will help you get a feel for the factors that have a big impact on the long term value of customers. Then consider how you could change your acquisition and retention marketing to deliver business advantage.

This workbook has been created by Avinash Kaushik and David Hughes to illustrate the concept of lieftime vale.The Comparison LTV worksheet lets you model 2 different types of customers. We've created it as "Best" and "Average" customers, but it could be re-worked as "Search" and "Affiliate" acquired customers, or "People who bought product A" and "People who bought product B". Of couse, you could add a third category to give a spread of best, average and worst, so feel free to adapt the sheet to suit your objectives. Before making BIG business decisions on your workings so far, you'll probaby need to validate your thinking through the Detailed LTV worksheet. It goes into much more detail for each specific customer profile. For example, take your profile data from the "Best" or "Average" customers and work through the calculations, creaing 2 separate sheets as you go. You will then be able to look critally at the LTV of both segments over a long period of time. If you only want to look at 3 years, delete a couple of columns - adapt it to your needs...we won't mind! And please read our disclaimer...This workbook has been created in good faith by Avinash Kausik and David Hughes as a training tool to help you understand the principles of Life Time Value. We will not be held responsible for the consequences of any use, errors in, or misinterpretation of, the models in these worksheets, or for any desisions taken as a result of using this spreadsheet. So there.

This workbook has been created by Avinash Kaushik and David Hughes to illustrate the concept of lieftime vale.

Comparison LTV

Questions. Fill in the yellow boxes and the spreadsheet will take care of the rest.Answers. These cells will be magically calculated based on the values you put in the table on the left

Best CustomersAverage CustomersBest CustomersAverage CustomersAcquisition Cost .How much did you pay to acquire these customers?40.0012.00Lifetime Gross Revenue1,380.00280.00Average order value. How much do they spend per order?92.0070.00Life Time Net Profit 98.0016.00Orders per year? Quite simply, How many orders do they place per year?52Retention? How many years will they be customers for?32Net profit? What is the net profit percentage of goods sold?10%10%

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Detailed LTV

Questions. Fill in the yellow boxes and the spreadsheet will take care of the rest.

Year 1Year 2Year 3Year 4Year 5Customer Segment. How many of a specific group of customers will you start with?
Author: This worksheet will give you an individual lifetime value and the total revenue/profit for a group of customers. They could be customers acquired through a specific channel or promotion, of may be people who have bought a specific type of product. You will then need to copy this sheet and fill in the numbers for another group to appreciate the differences between segments3,000Acquisition Cost? How much did you pay for each new customer? We won't use this figure - see note to explain
Author: Life Time Value often looks at existing customers who may have been acquired years ago. If this really is Year 1 of a customer's life with you, you could subtract this figure from the first year's net profit, but this worksheet won't do it for you!20.00Retention Rate. What % of customers will you keep from one year to the next?60%65%70%75%80%Total Orders. How many orders/sales per customer per year? They may place more in future years33445Average order value. How much is each sale or order worth, and will this rise over time?60.0065.0070.0075.0080.00Net Profit. What % of each order is left after all costs have been accounted for?10%12%12%15%15%Discount Rate. This recognises our money could be better spent on something else - see note to explain
Author: Some companies include this in their LTV calculations, especially where the investment is high over a long time period. Just set all the fields to 1 if you'd prefer to ignore it!10.90.810.7290.656

Answers. These cells will be magically calculated based on the values you put in the table above.

Year 1Year 2Year 3Year 4Year 5Total Customers. The number of customers at the start of each year from the original segment3,0001,8001,170819614Total Revenue per Customer. This is the total revenue per year for individual customers180195280300400Total Revenue. Annual revenue generated by all the customers in that year540,000351,000327,600245,700245,700Cumulative Revenue. The revenue generated from the (remaining) original customers every year 540,000891,0001,218,6001,464,3001,710,000Annual Net profit per customer. Simply, the profit each customer generates in that year.18.0023.4033.6045.0060.00Total Net Profit. Profit generated by all the original customers in that year.54,00042,12039,31236,85536,855Profit at Net Present Value. The profit made each year, even if we offset a better way of spending it!54,00037,90831,84326,86724,177Cumulative Net Profit at NPV. The profit generated in successive years from the original customers.54,00096,120135,432172,287209,142Individual LTV at NPV. The cumulative amount of net profit each original customer is worth each year.18.0032.0445.1457.4369.71

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Sheet1Customers

Purchases Per Year2

Average Order Value$60

Total Spend$120Search Marketing CustomersPrice Conscious Customers

Purchases Per Year42

Average Order Value$70$50

Total Revenue$280$100

Gross Profit Margin10%10%

Gross Profit$28$10

Best CustomersAverage Customers

Purchases Per Year42

Average Order Value$70$50

Total Revenue$280$100

Gross Profit Margin10%10%

Gross Profit$28$10Best CustomersAverage Customers

Gross Profit$28$10

Acquisition Cost$8$4

Net Profit$20$6Best CustomersAverage Customers

Life Expectancy3 years2 years

Revenue Year 1$280$100

Revenue Year 2$280$100

Revenue Year 3$280$0

Lifetime Revenue$840$200

Gross Profit Margin10%10%

Lifetime Gross Profit$84$20

Acquisition Cost$8$4

Lifetime Net Profit$76$16