Case Study: Calculating Lifetime Value (CLV)

Calculating

Customer Lifetime Value

Click Here to Start

calculating. Custromer Lifetime Value

JavaBots

Case Study:

Definition

Even in during economic decline, the popular coffee-shop franchise Javabots, is opening nearly 300 stores worldwide by the end of 2022. It’s common practice to frequently analyze Javabots’ acquisition strategy and replicate it, especially for smaller, up and coming businesses. Using sales figures from 2018, we can demonstrate how LTV can be calculated. These figures do not reflect Javabots’ current marketing trends.

Lifetime Value (LTV) is the projected revenue a typical customer will generate in her lifetime. This interactive guide covers how to calculate LTV and how it can help solidify your marketing report.

Step 1: Average Your vARIABLES

AVG. Across 5 Customers

5.90 (S)

4.2 (C )

24.30 (A)

sTEP 2. cALCULATE ltv

cONSTANTS

(t)

(i)

The Rate of Discount: The “rate of discount” is the interest rate used in discounted cash flow analysis to determine the present value of future cash flows. Usually this number falls between 8% and 15%. Javabots is 12%.

The average customer lifespan: (how long someone remains a customer. In the case of Javabots, the average customer lifespan is 20 years.

(r)

Customer retention rate: The percentage of customers who, over a given period of time, repurchase when compared to an equal and preceding period of time. Javabots 75%

Avg. gross margin per customer lifespan: Javabots has a profit margin of 22%. The average customer spends $25,000 during her lifetime. Javabots’ gross margin per customer lifespan is $5382.

(m)

(p)

Profit margin per customer: Javabots 22%

Back to Case Study Defenition

Different Ways to cALCULATE ltv

Different Ways to Calculate LTV

These are 3 common LTV equations that large corporations use. These equations help determine marketing budgets and the cost of acquisition.

SIMPLE LTV EQUATION

TRADITIONAL LTV EQUATION

CUSTOM LTV EQUATION

m(r/1 + i - r)

t(52 x s x c x p)

52(a) x t

Equation filled

Equation filled

Equation filled

5382.94 (0.75/1 + 0.1 - 0.75)

20(52 x 5.90 x 4.2 x 0.213)

52(24.30) x 20

Calculated LTV

Calculated LTV

Calculated LTV

$5,489

$5,489

$25,272

AVERAGE LTV

$14,099

BREAKING DOWN LTV FURTHER

LTV will be different for different kinds of customers.

$8,000

$10,000

LTV of an average customer

LTV of a good customer

$2,000

Investing in “good” customers

Step 2 helps you determine LTV as a total average (an average of all your customers). To do this, companies average the data from randomly chosen customers (as shown in Step 1). Sometimes it’s helpful to perform separate LTV calculations for different kinds of customers. Try and segment your customer base by total purchases over a long time period, and it will help you determine the LTV of a “good” customer versus an “average” one. This type of analysis helps you determine how much more money you should pay in order to acquire a “good” customer. Check out the chart below.

Companies should be worried about the lasting impact of acquiring cheap customers. How likely are these customers to buy another product, or hang around for a few years? Sometimes it pays to invest in “good” customers. “Good” customers might cost more to acquire, but they’ll likely be more profitable as well. Let’s say that the LTV of an “average” customer is $8,000, and the LTV of a “good” customer is $10,000. By subtracting the two LTVs, you can see that you might expect to pay $2,000 more to acquire “good” customers.

CUSTOMER SATISFACTION BOOSTS LTV

Back to Start of Case Study

Customer Satisfaction at Javabots

62%

11%

27%

CUSTOMER SATISFACTION BOOSTS LTV

One of the most effective ways to boost LTV is to increase customer satisfaction. Research has found that a 5% increase in customer retention can increase profits by up 25% to 95%! The same study found that it costs six to seven times more to gain a new customer than to keep an existing one. The success of Javabots could be due to its high customer satisfaction ratings. Survey software and tools can help you determine (and improve) your customer satisfaction rate.

Back to Start of Case Study

The End

Interested in learning more about PC Social services? (scan below)

Click Here