July 26, 2016

Just Show Me How To Calculate LTV

I know, I know, you just want simple math, something you can calculate on your own. 

Let's do something at a 30,000 foot level. Doing something at this level is better than the 90% of you who are not calculating LTV in any way, shape, or form.

Step 1:  Select any customer who purchased for the first time between 20100700 and 20110700.

Step 2:  Record the profit/loss generated by that customer on the first purchase. Don't have that data? Go get it. You wanted to do this yourself, so there are certain data elements you have to have. You'll have to speak with somebody in Finance. You'll have to speak with somebody in Marketing. You'll have to be proficient at calculating profit. You can do this!

Step 3:  In the next 12 months following the first order, please record the following data elements for each customer.
  1. Total net sales generated.
  2. Total gross margin dollars generated.
  3. Total ad cost spent against this customer.
  4. Margin Factor (percentage of margin that flows through to profit, independent of ad cost).
Step 4:  In months 13-24 following the first order, please record the following data elements for each customer.
  1. Total net sales generated.
  2. Total gross margin dollars generated.
  3. Total ad cost spent against this customer.
  4. Margin Factor (percentage of margin that flows through to profit, independent of ad cost).
Step 5:  In months 25-36 following the first order, please record the following data elements for each customer.
  1. Total net sales generated.
  2. Total gross margin dollars generated.
  3. Total ad cost spent against this customer.
  4. Margin Factor (percentage of margin that flows through to profit, independent of ad cost).
Step 6:  In months 37-48 following the first order, please record the following data elements for each customer.
  1. Total net sales generated.
  2. Total gross margin dollars generated.
  3. Total ad cost spent against this customer.
  4. Margin Factor (percentage of margin that flows through to profit, independent of ad cost).
Step 7:  In months 49-60 following the first order, please record the following data elements for each customer.
  1. Total net sales generated.
  2. Total gross margin dollars generated.
  3. Total ad cost spent against this customer.
  4. Margin Factor (percentage of margin that flows through to profit, independent of ad cost).
Now, this isn't going to get you to lifetime value, but it will get you to 5-year value, and that's a big deal.

Let's say that you have the following averages for Step 3, Step 4, Step 5, Step 6, and Step 7:
  • Step 3 = $80.00 Sales, 50% Gross Margin, $20.00 Ad Cost, 10% Margin Factor.
  • Step 4 = $60.00 Sales, 50% Gross Margin, $16.00 Ad Cost, 10% Margin Factor.
  • Step 5 = $45.00 Sales, 50% Gross Margin, $12.00 Ad Cost, 10% Margin Factor.
  • Step 6 = $35.00 Sales, 50% Gross Margin, $10.00 Ad Cost, 10% Margin Factor.
  • Step 7 = $25.00 Sales, 50% Gross Margin, $8.00 Ad Cost, 10% Margin Factor.
For each step, we calculate annual profit.
  • Step 3 = $80.00 * 0.50 - $20.00 - $80.00 * 0.50 * 0.10 = $16.00 profit.
  • Step 4 = $60.00 * 0.50 - $16.00 - $60.00 * 0.50 * 0.10 = $11.00 profit.
  • Step 5 = $45.00 * 0.50 - $12.00 - $45.00 * 0.50 * 0.10 = $8.25 profit.
  • Step 6 = $35.00 * 0.50 - $10.00 - $35.00 * 0.50 * 0.10 = $5.75 profit.
  • Step 7 = $25.00 * 0.50 - $8.00 - $25.00 * 0.50 * 0.10 = $3.25 profit.
Alright friends, we've got LTV:
  • Year 1 = $16.00 profit.
  • Year 2 = $11.00 profit, $27.00 cumm profit.
  • Year 3 = $8.25 profit, $35.25 cumm profit.
  • Year 4 = $5.75 profit, $41.00 cumm profit.
  • Year 5 = $3.25 profit, $44.25 cumm profit.
At a high level, you have LTV at a cumm level for each of the first five years a customer is on your housefile.

Remember yesterday when we calculated payoff horizons? Apply that logic to your customer base after knowing how much profit you generate from a first order, and you've got everything you need to perform a 30,000 foot level LTV analysis ... remember, 90% of folks aren't calculating anything, so by following the simple steps here, you are well ahead of the curve. From here, you can follow your favorite University Professor and dig deep into advanced LTV theory.

But at least you'll be ahead of 90% of the competition.

That counts for something, right?

And you didn't have to pay a penny to obtain the information.