Customer Lifetime Value

The high discount rate reflects the high cost of acquiring capital that new ventures face. It is important to be realistic, not optimistic when calculating LTV. You should give a range that reflects the level of precision you are comfortable with. Even more important is to be clear about the assumptions you’re making, as changes to those assumptions can drive that LTV higher or lower.

Joe Gibson, a lecturer at Clemson University, has developed a very useful LTV calculator which is available for free to download at https://www.d-eship.com/articles/ltv-calculation-spreadsheet/. Thousands of people have found this to be very helpful, but remember, you still need to interpret the results of the calculation!

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Now that you have chosen a business model (at least an initial one) and a pricing range in the previous two steps, you can develop an estimate of approximately how much a new average customer is worth to you. You will not know this number to great precision, but it is essential to understand the general order of magnitude and what drives the profitability of a new customer. Is it the initial sale? Consumables? Retention rates? Gross margin? Volume? Repurchases? Timing of purchases?

The detailed examples above should give you a good sense of how to do this and the worksheet below gives you further structure.

It should be noted that depending on your industry, you may find that a time period other than five years is more appropriate for your product. For instance, the LTV for customers purchasing a new power plant or pharmaceutical may not be comprehensive enough if you only look at the first five years. When determining whether to change this time period, consider first the length of the sales cycle, and second the amount of time it takes to develop your product.

Content will be published as it becomes available.

Content will be published as it becomes available.