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When you decide how to spend your marketing budget,
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you want to focus on some of your best customers,
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customers who will stay with you for the long-term,
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who will continue to generate revenue for the company longer than say,
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a customer who finds a cheaper deal somewhere else and leaves your website.
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In other words, you want to identify your high-value customer,
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so that you can focus on bringing in more of these customers.
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Think of it this way: Your goal is for every dollar you spend on
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your marketing efforts to give you a higher rate of
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return and generate revenue multiple times over.
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How do you go about doing that?
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You use a business metric called lifetime value of a customer.
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To calculate lifetime value,
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let's cover a few key concepts.
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Again, make sure you make a note of the terminology and definitions.
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They are going to get slightly complicated,
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but we will walk through each of them one by one.
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So, keep in mind we want to be able to estimate how much revenue we can expect
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to earn per customer as far into the future as we can.
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To calculate this, we need to take into account a lot of
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different metrics and data to create a single LTV metric.
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First, purchase cycle is a time period that
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depicts the general frequency with which your products are purchased.
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At Udacity, if we start a new nano degree class every two weeks,
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two weeks would be the purchase cycle.
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Total sales revenue per cycle is the revenue
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earned from all customers per purchase cycle.
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Number of sales per purchase cycle is the number of
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times your average customer buys during the purchase cycle.
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Cost per acquisition, you've seen this before.
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It's a total cost of marketing and sales divided by the number of new leads.
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With me this far, feel free to pause the video or [inaudible] ,
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review, and think about what I've said this far.
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Next, we have expectation retention time.
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This is the amount of time you expect to retain the customer.
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This is measured in terms of purchase cycles,
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what we covered right at the top of this list.
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So, if we expect a customer to be retained for a year given a two-week purchase cycle,
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then we have an ERT of about 26.
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Average sales revenue is the revenue you earn from
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the average customer per transaction during the cycle.
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This is the total customer revenue divided by the number of purchases in the cycle.
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Profit margin per customer is the percentage of sales that has turned into profits.
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Again, feel free to pause the video here and process what I've covered this far.
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Next, we have one last thing to do,
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calculate the lifetime value.
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Lifetime value is the average sale times the number of
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repeated sales times expected retention time times profit margin.
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Essentially, this is the net profit you can attribute to
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the customer over the length of their relationship with the company.
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Let's do this in Excel in the next video.
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