Profitability Calculators

 
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Customer Lifetime Value (20-Year Time Horizon)


Instructions

  1. Fill in all fields in the calculator.
     
  2. If you are unsure of what a field means, hover your mouse over it. An explanation will appear in the box at the bottom of the calculator.
     
  3. The calculator will automatically display a result when all fields contain some value. (This is true even if you've only entered the first of two or more digits in the last field. Don't worry, it will recalculate the result as you add more digits.)
     
  4. When you change a number, the calculator will automatically recalculate the result.
     
  5. The cost of the ads has already been subtracted. The campaign is profitable if the result is greater than zero. (It appears in green for a profit, red for a loss.)
  6. Some percentages should not be over 100. If you ignore a warning about a percentage value being too high, the calculator will still work but the result may not be meaningful.
     
  7. Don't evaluate an ad campaign solely on the results from this calculator. Note the caveats below.

Caveats

  1. This calculation makes some simplifying assumptions that will effect the result:
    • All costs are assumed to occur at the beginning of the year, while revenue is assumed to arrive at the end of the year. This is a conservative assumption that will lower the result somewhat.
    • All revenues received from referral customers (and referrals from referrals ... from referrals ... etc.) are assumed to be part of the value you receive by winning the original customer.
    • In the year the referral becomes a customer, he or she is assigned the same revenue as the original customer in that year, including any applied increases or decreases. Revenue from the referral customer is assumed to grow (or decline) at the same rate as for the original customer. (i.e.: In every year, all customers are assumed to buy the same value of goods and/or services.)
    • It is assumed that there are no sales & marketing "acquisition costs" for customers won through referrals. However, the ongoing marketing cost is applied to a referral in the first year he or she becomes a customer.
    • It is assumed that a customer only refers others in his or her second year as a customer.
    • There is no provision to increase the ongoing annual marketing & sales costs over time.
    • The calculation uses a 20 year timeframe. While a customer and/or the customers he or she refers may do business with you for longer, unless the discount rate is very low, discounting makes later cash flows insignificant.
       
  2. This calculation cannot predict the value of a particular customer, only a hypothetical customer that is representative of your customer base.

    For example, if you use a retention rate of 80%, the calculation assumes that the customer only 80% exists in the second year. Likewise, if you use a referral rate of 5%, the calculation adds 5% of a customer in the second year. Clearly, this is not possible. A customer either exists or not. However, when extrapolated over a large customer base this number should provide a rough approximation of the value of all customers exhibiting similar characteristics.
     
  3. The result is only as good as the input you provide. Since it is impossible to predict future retention, referral and other rates, even with good historical data in hand, you should redo your calculations with various values to find best and worst cases. The calculator's greatest value is in helping you gain a clear understand which factors to focus on in order to achieve the highest profitability. (e.g., Which provides a higher lifetime value: increasing retention rates or increasing profit margins?)