Life Time Value - Acquisition Cost Calculator
This tool will calculate the Life Time Value of a customer, which is the monetary value of a customer over their lifespan as a customer. And, based on the calculated result, you can determine what you can afford to spend on new customer acquisition.
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Definitions (Click to Open)
Life Time Value (LTV): Is a term used to describe the monetary value of a customer (their purchasing) to a company over the customer's lifetime as a customer. Customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.
Period (Life of Customer in Yrs.): The unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. Customer lifetime value is a multi-period calculation, usually stretching 3–7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. The number of periods used in the calculation is sometimes referred to as the model horizon.
Retention Rate: Retention, or customer retention in this case, refers to the percentage of customer relationships, that once established, a business is able to maintain on a long-term basis. For example, a company only retains 90% of existing customers a year. They could be lost for a variety of reasons, defection to other companies, death, etc. The opposite of retention rate is ""churn rate,"" which is the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. This model uses retention rate, although most models can be written using either churn rate or retention rate. If the model uses only one churn rate, the assumption is that the churn rate is constant across the life of the customer relationship.
Inflation Rate: The percentage increase in the price of goods and services, usually annually.
Discount Rate: The cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.
New Customer Acquisition Cost Spend Percentage: This is the percentage of proof that you can afford to spend on acquiring one new customer. The default value is set at 10%, but it can be changed to fit your situation and to do "what-if-analysis." Many marketers make the mistake of basing their affordable acquisition cost on the first purchase the customer makes. But, the correct method is to base the maximum acquisition cost per customer on the average customer life time value. This should include all promotional costs (advertising, direct marketing, sales promotion, public relations and sales force costs.)
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