Lifetime Value
When deciding how to spend the marketing budget, you want to focus on some of your best
customers – those that will stay for the long term and continue to generate revenue for the
company.
These are your high-value customers and you want to bring in more of them.
Your goal should be for every dollar spent on marketing efforts. It should provide a higher rate
of return and generate revenue multiple times over.
Terms needed to calculate Lifetime Value:
Purchase Cycle: The time increment adopted for business calculations
Total Sale Revenue Per Cycle: Revenue earned from a customer per purchase cycle
Number of Sales Per Purchase Cycle: Number of times customer buys during the purchase cycle
Cost Per Acquisition: (Cost of marketing and sales)/ number of new leads
Expected Retention Time: Amount of time (measured in purchasing cycles) you expect to retain
the customer.
Average Sale Revenue: (Total customer revenue/ Number of purchases in the cycle) OR Average
revenue received from the customer per transaction during the cycle
Profit Margin Per Customer: ((Average Sale - Average Cost of Sale) / Average Sale)
Lifetime Value (LTV) = Average Sale x Number of Repeat Sales x Expected Retention Time x
Profit Margin
Revenues: The money a company makes from the sales of its products and services.
Cost of Goods Sold (COGS) or Cost of Sales: These are the direct costs the company incurs to
develop the product or service being sold.
Gross Profit: The difference between the revenue earned and the costs summarized in COGS.
Gross Profit = Revenue - COGS
Selling, General, and Administrative expenses (SGAs): Includes the following expenses:
Marketing, sale commissions
Salaries for office staff
Supplies and computer hardware
Note: Some companies list total operating expenses separately from SGAS while others treat
them as synonymous with SGAS.
Operating expenses: Expenses incurred outside of direct manufacturing costs:
Overhead costs
Legal
Rent
Utilities
Taxes
Interest
R&D expenses.
Total Operating Expenses = Sum of SGAs and Operating expenses Total Operating Expenses=
SGAs + Operating Expenses
Operating Income: The difference between Gross profit and Total operating expenses Operating
Income = Gross Profit - Total Operating Expenses
Note: Operating Income is also referred to as Earnings Before Interest and Tax (EBIT)
Net Income: Subtracting the Interest and Tax from Operating Income gives the Net Income Net
Income = Operating Income - (Interest and Taxes)
Topics Covered
Key Performance Indicators: We discussed key performance indicators and how they differ by
industry.
Business Process Flow: We went through the business process flow across various divisions.
This provided the context for learning about the business metrics.
Business metrics: We took on each business area, such as marketing and growth, and introduced
you to a metric commonly used to measure success in that business area. We discussed what
each meant and how to calculate it. We practiced calculating the metrics and applying the
metrics, as well as when and where to use the metric. To do this, we focused on 3 main elements
related to metrics:
Evaluate important business metrics
Interpret and analyze these metrics
Create visualizations of these metrics
Distribution and central tendency: We circled back to the topic of data distribution that you
learned about in the previous lesson and discussed why paying attention to the distribution of the
data and the choice of the measure of central tendency was important.
Grouping data: We ended with a discussion on how to look at the data across groups, cohorts,
and time.
Let's take a moment to summarize the key take-aways from this lesson.
Overarching Themes Summary
Businesses use Key Performance Indicators to track how they are performing on key goals or
objectives.
The Marketing Funnel captures the various stages in the customer's journey. At the top of the
funnel, it captures the impressions, clicks, leads, and conversions at the bottom of the funnel.
Optimizing the funnel refers to maximizing the conversion rate at each level of the funnel.
The Sales Funnel captures the various stages in the sales cycle. At the top of the funnel, it
captures the prospects, then the leads and qualified leads, and ends with bookings or closed deals
at the bottom of the funnel.
It is important to look at the distribution of the data to understand if the measures of central
tendency represent a normal distribution. Looking at the distribution and measures of central
tendency is a critical step of the data analysis process.
Data should be examined split across cohorts, business cycles, time, product lines, regions, and
other grouping criteria to fully understand the data. It is critical to slice the data across various
factors to make sense of the data and make recommendations.
Metrics
Marketing
Click Through Rate (CTR) is an indication of whether the ad campaign is generating enough
interest in potential customers. When the CTR increases, it is an indicator of effective and
interesting content in your ad campaign, and that maybe you should increase the number of
impressions for that ad.
Cost Per Click (CPC) is an indicator of the cost-effectiveness of the ad platform and a useful tool
to compare and strategize about which marketing platform is yielding higher impression and
reach and resulting in potential leads.
Cost Per Lead (CPL) is an indicator of the cost-effectiveness of the ad platform and a useful tool
to compare and strategize about which marketing platforms yielded more leads.
Customer Acquisition Cost (CAC) is a useful metric used to get an estimate of how much it cost
us to acquire the customer in the period the money was spent to reach out to them.
Marketing and Financial
Cost Per Acquisition (CPA) allows a business to gauge whether the marketing campaign is
generating enough potential leads.
Life Time Value (LTV) allows you to focus on audiences and potential customers that will
generate higher LTVs with minimum customer acquisition cost. There are several ways to
calculate the Life Time Value and it is best to calculate the LTV using different ways to arrive at
the average LTV for a customer.
Growth
Stickiness indicates whether the customers are staying and returning to the website frequently
enough. It is a good measure of the potential growth of the business.
Churn rate is a measure of declining growth and businesses aim to have a higher growth rate than
churn rate. It is a measure of whether the business is retaining the acquired customers.
Financial
The Profit and Loss Statement also called an income statement, is one type of financial statement
that shows a company's performance and financial position. needed to create the P&L statement
are:
Revenue is the money that your company makes from the sales of your products and services
Cost of Goods Sold OR Cost of Sales are the direct costs the company incurs to develop and
produce the product or service being sold
Gross Profit is the difference between the revenue and COGS
Selling, General, and Administrative expenses capture a wide range of expenses, from
administrative, sales commissions, supplies, legal fees, rent, utilities, taxes, and interests. It is
used synonymously with Operating expenses. SG&A typically excludes research and
development expenses.
Operating Profit is the difference between gross profit and total operating expenses.
Net Income is operating profit minus interest and tax expenses.
Gross Margin tells business executives what percentage of each revenue dollar is available to
cover operating expenses after the COGS have been accounted for.
Contribution Margin provides the break-even point where the pricing of a product will cover
fixed overhead costs.
