Hi Geoff - Great video! The explanations were very helpful. Thank you. 2 follow up questions. 1. How do you estimate the average churn or retention rate for the business across years 1,2,3 ... as you have done? 2. In this example, why do we use a 5 year horizon for calculations? How do we decide what horizon length to use when doing CLV calculations for marketing campaigns? Thanks again!
1. Retention rate is critical for identifying customer lifetime value, as highlighted in the video. Typically firms would use their historical/current retention rate as the foundation of their forecasts. Many firms would have some inbuilt loyalty/retention marketing activities, and of course, retention rates would slightly increase over time with the customer cohort has dissatisfied customers are more likely to leave earlier. 2. I have used a five year horizon in this video simply for the sake of simplicity and explaining the concept. However, in real life you could have an unlimited horizon. For the Excel template I have on the website, I provide customer lifetime value for 10 years and also for 50 years. While 50 years may seem a long period, in theory service firms such as banks and insurance companies, accounting firms, doctors, and so on, could have customers for their entire adult lifetime. However, if you utilize the Excel template you will see that there is minimal difference between a 10 year and a 50 year customer lifetime value, simply because the likelihood of the customer continuing over that time (which is the cumulative retention rate) is so low past the 10 year period. Therefore, I would suggest that a 10 year horizon for any customer across any consumer focused business would be quite acceptable and would be unlikely to vary significantly even if you took a longer time frame. Certainly beyond the 10 year horizon, there is a lot of competitive and environmental uncertainty anyway, which is likely to reduce the credibility of your forecast within a firm. However, calculating customer lifetime value in the business-to-business market may look at a longer time frame, particularly if long-term contracts are being put in place.
Excellent video, Geoff! Everything makes sense to me except the likely customer profit line. I understand the concept of getting zero sales from the original customers who have left, but why calculate it that way? You’re still getting the average profit from the remaining customers. I’m having trouble understanding why we are considering the ex-customers in this calculation. If we wanted to calculate revenue for a particular year, we would multiply remaining customers by the average profit, not by the likely profit, right? Thanks, Geoff for any clarity you can provide here.
Hi Scott, The future retention rate is a forecast based on our best knowledge (and historic data), making the cumulative retention % an estimate. So by Year 5, we estimate that 20% of customers are remaining, which then is used to derive "likely customer profit". Given this approach, the 80% of ex-customers are removed and do not provide profits, that all comes from the remaining 20%. This construction enables us to play with scenarios of what happens if we increase retention rate, or annual profit - and which would deliver more CLV $'s. Thanks, Geoff
Marek Fajer Hi Marek, That's right - the acquisition cost is a negative cash flow. I tend to use the absolute number and then subtract it in the formula, but it could be shown as a negative value. Thanks, Geoff
In the first example, what are the Retention and Churn rates based off of? Every year? 2 years? 5 years? Everyone that they've kept and lost from the first day of their business? It's hard for me to ask a business owner what their retention and churn rates are if I don't know the timeframe I need to calculate by.
Retention/churn rates are an annual metric. They are used to determine the probability of keeping customers in future years. Example - at a churn rate of 80% each year, at year 2 there is a 64% probability of keeping the customer (80% X 80%). We look at customer segments or customer acquired from a certain channel/promotion, rather than the overall customer base - which means we will have multiple CLVs. A number of these issues are addressed on www.clv-calculator.com
Hey Geoff, thank you for this. I don't understand the idea of likely customer profit. Why should we consider this calculation, when we already have average customer profit? How is it that in year 5, our remaining customers are spending more with us but the likely customer profit is low? The LCP for year 2 is higher, when they're not spending as much with us. Does this mean that our average customer profit is not as important as our LCP? Having problem understanding this.
Hello, thanks for this! Question: is there a way to build out the advanced version of your 5 year LTV model using a monthly churn rate? Whats the best way to annualize it? should i compound it?
Hi, I have data of 1 year, Can I calculate CLV, if not, how many years of data I would need to start analyzing. What type of analysis I can perform on 1 year customer database
Hi Tanya - It is possible, as you have profit per customer and acquisition costs. You will need to estimate retention/churn rate, but the business may have some idea of that as their customers roll into year 2. And if they have data per customer, they may be able to have a good estimation of retention. They would also have data on cross-selling of other products to input to the CLLV calculation. Hope this helps as a start. Geoff
Thank you for this video! Had a small doubt regarding the customer retention rate, how did we decide the rate to be 60% for year 2, is there a formula for it or was it just a logical pick?
Normally we would rely upon our customer base information for likely retention rates. If it is purely a forecast, then we need to apply a benchmark based upon other similar businesses.
@@MarketingStudyGuide Thank you so much for the clarification, absolutely love your work on the channel. Since the video was old, I was not expecting a reply, very thankful!
I have an article on this at ...www.clv-calculator.com/customer-retention/converting-retention-rate/ Basically you are inverting the fraction. Say the churn rate is 25%, which is 1/4 - when you divide into 1 - as follows 1/(1/4) it becomes 4. And 1/5 becomes 5 and so on. Hope this helps - please see the article as well.
Yes, it shows that the business makes $31 overtime for every $4 spent on acquiring a new customer. Even allowing for some variations with assumptions, the numbers look very good.
@@MarketingStudyGuide But if my total revenue per customer for 5 years is $20+21$..$25 = $115 . My LTV = $31 . DOES IT MEAN I'M lagging $84 ? Plus sir , I'm facing difficulty in explain the negative value at cummulative LTV to my juniors ..
Hi Geoff! Thank you for the video! I am building a model for a company with different customer segments. One of the customer segments buy over 2 years and then stop - so that is 50% retention rate. If I am going to model likely revenue from these (or likely profit for that matter), do I input 50% in year 1 and year 2 and then 0% or do I keep it 50% for ever? :) If I know that they stop buying after 2 years.... then that means it's 0% retention after year 2, doesn't it?
Great question. Retention rate works best with the customer's ability to switch at any time - such as a fitness center membership paid monthly. But what I think that your question refers to is some form of fixed contract for two years? In that case, retention would be 100% for years 1 and 2 and then 0% for year 3 (no customers continually for the 3rd year). Please note that this is based on my assumptions from reading your question that it is a form of a fixed two-year deal. Hope this helps.
In the FCLV example， is it for simplicity sake that no profit in year 0？though new customer incurs acqusition cost，they do contribute to profit. So should we need to include the profit in year 0 in real life calculation？
It is just for simplicity. In some industries the acquisition cost comes first and the income is received over time - such as in banking and insurance. However, in most industries the income and acquisition cost would both occur simultaneously in year 0, before any discount effects. Geoff.
JHORGE D'O Churn rate is the 'loss of customers' %. It is the opposite of the customer loyalty or retention rate (e.g. if the retention rate of customers is 75%, then the churn rate is 25%). The full CLV formula is discussed here... www.clv-calculator.com/customer-lifetime-value-formulas/clv-formula/
Hi Geoff. Thanks for the detailed video explanation for the customer LTV. I have been searching a lot recently for the best method to calculate CLV for the company I work for but I still am doubting myself on a few things: 1. I want to put CLV as a KPI but does it make any sense to calculate a monthly CLV? I wanted to calculate CLTV for a year in advance or max 2 but update it on a monthly basis. 2. We operate on 99% of the cases with hourly rates with our customers and we do not have a subscription based service or a fixed contract. Can I still make use of your model in my case? 3. Should revenues from existing customers be taken into account when performing the CLV? Thanks a lot :)
Sure, depending on the business model, a monthly customer lifetime value is probably more appropriate - particularly if customers can come and go at any time and the cash flow is on a weekly or monthly basis. Given your business does not have a fixed contract situation, a customer lifetime value would probably be very helpful, as you would need some estimates of likely income and customer value - which you cannot get from a simple contract times number of customers approach. You should look at new customers versus existing customers - and then calculate at least two types of customer lifetime value. Ideally, you should also look at key segments, if there are significant differences between types of customers in your business.
Channel 3 400000 Direct cost of Channel (INR) 200 Discount coupon value (in INR) 5000000 Channel Reach 2% Conversions to sign-up 50% Conversion to first order 20 Orders in subsequent months per consumer 200 Average order size 25% FoodFox Margin 60% Retention rate 1. You can calculate the churn rate as (100 - retention rate) % 2. For this example, use the acquisition cost in the CLV formula as taught in the module lectures 3. Take the margin (which is same as profit) as 25% of the order value how do you calculate CLV here
Please explain how the SCLV=(customer lifetime*Profit)-Average Acquisition cost? It should be = (customer lifetime*Average Customer Revenue)-Average Acquisition cost.
We need to consider the "bottom-line" profit impact of a customer. Firms and industries differ with their profit margin. Let's take two firms that both receive sales/revenues of $1,000 from a customer. But Firm A has a 60% margin (profit = $600), whereas Firm B only has a 10% margin ($100 profit). Therefore, while both customers contribute the same revenue, they differ significantly with profit. CLV is designed to measure the overall value (profit contribution over time) per customer to help aid in marketing decisions of acquisition costs and the ROI on improving CLV.
Businesses in growth markets, start-up firms, small/medium sized enterprises could achieve this overall. However, the customer lifetime value relates to an individual customer, who would typically start with a low-value purchase and increase their relationship and spend overtime.
I think you have done a silly mistake ... In the first calculation you should have done CLV= average years*( revenue- aquisition cost) CLV= 4*(1000-500)=2000 But you used wrong excel formula and did CLV = 4*1000-500 =4000-500 =3500 which is wrong rectify it
Hi KingKan, The CLV calculation shown in the video is correct at $3,500. The acquisition cost of a customer is only incurred once, not each year as suggested by your formula. Therefore, the formula is CLV = average years X annual profit - acquisition cost = 4 X $1,000 - $500 = $3,500. Geoff
Hi Geoff - Great video! The explanations were very helpful. Thank you.
2 follow up questions.
1. How do you estimate the average churn or retention rate for the business across years 1,2,3 ... as you have done?
2. In this example, why do we use a 5 year horizon for calculations? How do we decide what horizon length to use when doing CLV calculations for marketing campaigns?
Thanks again!
1. Retention rate is critical for identifying customer lifetime value, as highlighted in the video. Typically firms would use their historical/current retention rate as the foundation of their forecasts. Many firms would have some inbuilt loyalty/retention marketing activities, and of course, retention rates would slightly increase over time with the customer cohort has dissatisfied customers are more likely to leave earlier.
2. I have used a five year horizon in this video simply for the sake of simplicity and explaining the concept. However, in real life you could have an unlimited horizon. For the Excel template I have on the website, I provide customer lifetime value for 10 years and also for 50 years.
While 50 years may seem a long period, in theory service firms such as banks and insurance companies, accounting firms, doctors, and so on, could have customers for their entire adult lifetime. However, if you utilize the Excel template you will see that there is minimal difference between a 10 year and a 50 year customer lifetime value, simply because the likelihood of the customer continuing over that time (which is the cumulative retention rate) is so low past the 10 year period.
Therefore, I would suggest that a 10 year horizon for any customer across any consumer focused business would be quite acceptable and would be unlikely to vary significantly even if you took a longer time frame. Certainly beyond the 10 year horizon, there is a lot of competitive and environmental uncertainty anyway, which is likely to reduce the credibility of your forecast within a firm.
However, calculating customer lifetime value in the business-to-business market may look at a longer time frame, particularly if long-term contracts are being put in place.
Perfect! Thanks for taking the time to explain Geoff. Super clear, especially the reasoning behind time horizon.
I'll definitely remember this method moving forward, thank you!
Best video of CLV calculation
Thanks Keshav = glad it was helpful.
Excellent video, Geoff! Everything makes sense to me except the likely customer profit line. I understand the concept of getting zero sales from the original customers who have left, but why calculate it that way? You’re still getting the average profit from the remaining customers. I’m having trouble understanding why we are considering the ex-customers in this calculation. If we wanted to calculate revenue for a particular year, we would multiply remaining customers by the average profit, not by the likely profit, right?
Thanks, Geoff for any clarity you can provide here.
Hi Scott, The future retention rate is a forecast based on our best knowledge (and historic data), making the cumulative retention % an estimate. So by Year 5, we estimate that 20% of customers are remaining, which then is used to derive "likely customer profit".
Given this approach, the 80% of ex-customers are removed and do not provide profits, that all comes from the remaining 20%.
This construction enables us to play with scenarios of what happens if we increase retention rate, or annual profit - and which would deliver more CLV $'s. Thanks, Geoff
Hello Geoff, shouldn't you have CLV- per year in year 0 *value -500* ? Thank for the great vid anyway.
Marek Fajer Hi Marek, That's right - the acquisition cost is a negative cash flow. I tend to use the absolute number and then subtract it in the formula, but it could be shown as a negative value. Thanks, Geoff
+MktgStudyGuide Had the same question. Thanks for clarifying
In the first example, what are the Retention and Churn rates based off of? Every year? 2 years? 5 years? Everyone that they've kept and lost from the first day of their business? It's hard for me to ask a business owner what their retention and churn rates are if I don't know the timeframe I need to calculate by.
Retention/churn rates are an annual metric. They are used to determine the probability of keeping customers in future years. Example - at a churn rate of 80% each year, at year 2 there is a 64% probability of keeping the customer (80% X 80%).
We look at customer segments or customer acquired from a certain channel/promotion, rather than the overall customer base - which means we will have multiple CLVs.
A number of these issues are addressed on www.clv-calculator.com
MktgStudyGuide thank you for clearing that up!
Hey Geoff, thank you for this. I don't understand the idea of likely customer profit. Why should we consider this calculation, when we already have average customer profit? How is it that in year 5, our remaining customers are spending more with us but the likely customer profit is low? The LCP for year 2 is higher, when they're not spending as much with us. Does this mean that our average customer profit is not as important as our LCP? Having problem understanding this.
Likely customer profit is a probability measure = what is the % likelihood that they will still be our customer in X years.
Nice video. Very good explanations as well!
Simple and Lucidly explained. Thanks :)
Hello, thanks for this! Question: is there a way to build out the advanced version of your 5 year LTV model using a monthly churn rate? Whats the best way to annualize it? should i compound it?
Hi, I have data of 1 year, Can I calculate CLV, if not, how many years of data I would need to start analyzing. What type of analysis I can perform on 1 year customer database
Hi Tanya - It is possible, as you have profit per customer and acquisition costs. You will need to estimate retention/churn rate, but the business may have some idea of that as their customers roll into year 2. And if they have data per customer, they may be able to have a good estimation of retention. They would also have data on cross-selling of other products to input to the CLLV calculation. Hope this helps as a start. Geoff
Thank you for this video! Had a small doubt regarding the customer retention rate, how did we decide the rate to be 60% for year 2, is there a formula for it or was it just a logical pick?
Normally we would rely upon our customer base information for likely retention rates. If it is purely a forecast, then we need to apply a benchmark based upon other similar businesses.
@@MarketingStudyGuide Thank you so much for the clarification, absolutely love your work on the channel.
Since the video was old, I was not expecting a reply, very thankful!
Very Nicely Explained ..Loved it
Should I get the same answer if I take the net present value using 10% discount rate and cash flows of acquisition cost and then profit per year?
Yes, the built-in net present value formula in Excel will deliver the same result.
Thank you for your prompt and courteous response.
Video rất hay và bổ ích
silly question, can you explain why you divide 1 by the churn rate to get the avg. lifetime in years?
I have an article on this at ...www.clv-calculator.com/customer-retention/converting-retention-rate/
Basically you are inverting the fraction. Say the churn rate is 25%, which is 1/4 - when you divide into 1 - as follows 1/(1/4) it becomes 4. And 1/5 becomes 5 and so on.
Hope this helps - please see the article as well.
Hello sir , my LTV turned out to be $31 and cost of acquisition came to be $4 . 31/4 = 7.. so is it a profitable one ?
Yes, it shows that the business makes $31 overtime for every $4 spent on acquiring a new customer. Even allowing for some variations with assumptions, the numbers look very good.
@@MarketingStudyGuide But if my total revenue per customer for 5 years is $20+21$..$25 = $115 . My LTV = $31 . DOES IT MEAN I'M lagging $84 ? Plus sir , I'm facing difficulty in explain the negative value at cummulative LTV to my juniors ..
Hi Geoff! Thank you for the video! I am building a model for a company with different customer segments. One of the customer segments buy over 2 years and then stop - so that is 50% retention rate. If I am going to model likely revenue from these (or likely profit for that matter), do I input 50% in year 1 and year 2 and then 0% or do I keep it 50% for ever? :) If I know that they stop buying after 2 years.... then that means it's 0% retention after year 2, doesn't it?
Great question. Retention rate works best with the customer's ability to switch at any time - such as a fitness center membership paid monthly.
But what I think that your question refers to is some form of fixed contract for two years? In that case, retention would be 100% for years 1 and 2 and then 0% for year 3 (no customers continually for the 3rd year).
Please note that this is based on my assumptions from reading your question that it is a form of a fixed two-year deal. Hope this helps.
In the FCLV example， is it for simplicity sake that no profit in year 0？though new customer incurs acqusition cost，they do contribute to profit. So should we need to include the profit in year 0 in real life calculation？
It is just for simplicity. In some industries the acquisition cost comes first and the income is received over time - such as in banking and insurance. However, in most industries the income and acquisition cost would both occur simultaneously in year 0, before any discount effects. Geoff.
Please define the term and function of the Average Churn Rate. Thanks
JHORGE D'O Churn rate is the 'loss of customers' %. It is the opposite of the customer loyalty or retention rate (e.g. if the retention rate of customers is 75%, then the churn rate is 25%). The full CLV formula is discussed here...
www.clv-calculator.com/customer-lifetime-value-formulas/clv-formula/
saved my ass, thank you!
Great news - happy to help...
Hi Geoff. Thanks for the detailed video explanation for the customer LTV. I have been searching a lot recently for the best method to calculate CLV for the company I work for but I still am doubting myself on a few things:
1. I want to put CLV as a KPI but does it make any sense to calculate a monthly CLV? I wanted to calculate CLTV for a year in advance or max 2 but update it on a monthly basis.
2. We operate on 99% of the cases with hourly rates with our customers and we do not have a subscription based service or a fixed contract. Can I still make use of your model in my case?
3. Should revenues from existing customers be taken into account when performing the CLV?
Thanks a lot :)
Sure, depending on the business model, a monthly customer lifetime value is probably more appropriate - particularly if customers can come and go at any time and the cash flow is on a weekly or monthly basis.
Given your business does not have a fixed contract situation, a customer lifetime value would probably be very helpful, as you would need some estimates of likely income and customer value - which you cannot get from a simple contract times number of customers approach.
You should look at new customers versus existing customers - and then calculate at least two types of customer lifetime value. Ideally, you should also look at key segments, if there are significant differences between types of customers in your business.
@@MarketingStudyGuide Thank you very much Geoff for your detailed explanation :)
Channel 3
400000 Direct cost of Channel (INR)
200 Discount coupon value (in INR)
5000000 Channel Reach
2% Conversions to sign-up
50% Conversion to first order
20 Orders in subsequent months per consumer
200 Average order size
25% FoodFox Margin
60% Retention rate
1. You can calculate the churn rate as (100 - retention rate) %
2. For this example, use the acquisition cost in the CLV formula as taught in the module lectures
3. Take the margin (which is same as profit) as 25% of the order value
how do you calculate CLV here
Sounds like an assignment question. I'm sure if you follow your lecture notes that you can work it out.
Please explain how the SCLV=(customer lifetime*Profit)-Average Acquisition cost? It should be = (customer lifetime*Average Customer Revenue)-Average Acquisition cost.
We need to consider the "bottom-line" profit impact of a customer. Firms and industries differ with their profit margin. Let's take two firms that both receive sales/revenues of $1,000 from a customer. But Firm A has a 60% margin (profit = $600), whereas Firm B only has a 10% margin ($100 profit). Therefore, while both customers contribute the same revenue, they differ significantly with profit.
CLV is designed to measure the overall value (profit contribution over time) per customer to help aid in marketing decisions of acquisition costs and the ROI on improving CLV.
I find it a bit hard to believe a customer revenue CAGR of 100% over 5 years. What kind of business is that ?
Businesses in growth markets, start-up firms, small/medium sized enterprises could achieve this overall. However, the customer lifetime value relates to an individual customer, who would typically start with a low-value purchase and increase their relationship and spend overtime.
I think you have done a silly mistake ...
In the first calculation you should have done CLV= average years*( revenue- aquisition cost)
CLV= 4*(1000-500)=2000
But you used wrong excel formula and did CLV = 4*1000-500
=4000-500
=3500 which is wrong rectify it
Hi KingKan,
The CLV calculation shown in the video is correct at $3,500. The acquisition cost of a customer is only incurred once, not each year as suggested by your formula.
Therefore, the formula is CLV = average years X annual profit - acquisition cost = 4 X $1,000 - $500 = $3,500.
Geoff
That is not a mistake. The acquisition cost per custom is just one a one time cost, it is not a cost each month.