Original subtitles

So, to calculate the lifetime value,

let's use this formula.

We're going to go ahead and break each piece up,

so that we can see how to calculate each of these components of the formula,

and we're going to use the week r example again.

Let's assume a typical week our customer orders groceries once a week,

for say $70 per order.

So, our purchase cycle we can make it to be one week,

total sales revenue per cycle would be the $70 we

expect to earn from the customer during this purchase cycle,

to 70, and then the number of sales per

purchase cycle would be the number of times the customer buys during the purchase cycle,

which would be one order per week.

So, one order per customer cycle, which is one.

Now, let's go ahead and calculate the other pieces of the formula.

To calculate the other two pieces of the formula,

you need to take into account cost per acquisition as well as average sales revenue.

So, let's walk through these.

So, the cost per acquisition is the CPR that we've calculated before.

So, let's assume this to be $25.

So, it takes about $25 of sales and marketing costs to get a need.

The expected retention time is the amount of time

which is measured in purchase cycles that you expect to retain the customer.

I think we can aim a customer to stay with our business for, say seven years,

when she say, think of our own experience as a grocery buyer and online shopper.

So, this would be seven years,

but since we need this in the purchase cycles as that is our unit.

So, we're going to go seven years times 52.

So, that's how I got this.

So, this would be seven times 52 weeks per year,

so that gives us 364 weeks across seven years.

Average sales revenue is the average revenue we

receive from the customer per transaction during the cycle.

We calculate this above.

This is $70 per cycle,

so that's 70 here,

and then profit margin per customer.

The way to calculate this is average sale,

which is $70 minus the average cost of sales.

So, this would be where you can plug in the cost per acquisition,

so over the average sales.

So, this would be this minus this over 70.

Okay. So, that's $0.64 on a dollar.

That's the profit margin per customer.

Now, we're ready to plug all of that in into the lifetime value formula.

So, we're ready to plug in the values for the lifetime value now.

So, this is going to be our average sale,

which is 70 times number for peak sales,

which is one times expected retention time,

which is these number of weeks across seven years times the profit margin.

So, 16,380 or the value that a customer would bring to a company.

So, now that you know that an average customer value is 16,380,

the company should spend less than this to obtain a new paying customer.

It is spending more than this,

the company may be making losses in the long run.

One other thing, I have seen several equations for lifetime value.

It is generally recommended to calculate lifetime value using a few different ways,

so you can get a better estimate of your average lifetime value.

We've provided a few links below for you to

see what are the other ways to calculate lifetime value of a customer.