Customer Life time value

Question

A cable company spends on average $600 to acquire a customer. Annual maintenance costs per customer — $45; record-keeping and billing costs — $30 per customer per annum. Price of a basic service package — $30 per month. Typically, 40 percent of customers buy a premium package — $50 per month; 10 percent buy the superpremium package — $80 per month. The average discount rate provided to each customer is 12%. Over time, 80 percent of customers remain with the company from one year to the next.

What is the average CLV for all customers?

What is the true average CLV for all customers?

What is the true average CLV of a superpremium customer?

Answer 1

CLV is a crucial concept for marketing because it proves you can spend a lot of money up front to bring in a customer, even though you don't see any profit for quite some time. You calculate CLV the same way you would a net profit -- revenue minus costs -- except you have to consider the added dimension of time.

I'll show you how to calculate average CLV for all customers and you can extrapolate.

Step 1: calculate costs

One-time:

$600 CPA (cost per acquisition)

Recurring, annual:

$45 Annual maintenance costs per customer

$30 record-keeping and billing costs

This is the easiest part. The only thing we want to be wary of is we don't accidentally mix up the one-time CPA with the annual costs.

Step 2: calculate revenue

We're calculating the composite revenue here -- averaging out the revenue generated by all 3 different packages.

Formula:

(rate * (1 - discount) * percentage_of_users) * 12

($30 * (1 - 0.12) * .5) * 12 = $158.40

So, the half of all customers who take the basic service package pay $158.40 per year.

The figures for the premium and superpremium packages yield $211.20 and $84.48, respectively.

Add the three numbers together and you get annual composite revenue of $454.08

Step 3: net out year 1

Easy-peasy!

Formula: revenue - costs = profit

$454.08 - $675 = $-220.92

Step 4: net out year 2

Same formula as step 3 with one exception: we're going to eliminate 20% of the revenue AND the costs (because we retained 80% of the customers). Note also our one-time CPA of $600 is gone -- so costs are now significantly less:

Formula: (revenue - costs) * retention_rate = profit

$454.08 - $75 = $303.26

Step 5: repeat

Now it's simpler -- you can just multiply last year's net profit by retention rate. I did this out to year 10:

3	$194.09
4	$155.27
5	$124.22
6	$99.37
7	$79.50
8	$63.60
9	$50.88
10	$40.70

(I stopped at 10 years because that seemed reasonable -- different industries have different benchmarks for effective CLV durations.)

Step 6: sum it up!

Now just add the net values of each year, 1-10, to get CLV. I get $889.98 -- what did you get?