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So, to calculate the lifetime value,
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let's use this formula.
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We're going to go ahead and break each piece up,
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so that we can see how to calculate each of these components of the formula,
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and we're going to use the week r example again.
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Let's assume a typical week our customer orders groceries once a week,
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for say $70 per order.
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So, our purchase cycle we can make it to be one week,
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total sales revenue per cycle would be the $70 we
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expect to earn from the customer during this purchase cycle,
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to 70, and then the number of sales per
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purchase cycle would be the number of times the customer buys during the purchase cycle,
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which would be one order per week.
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So, one order per customer cycle, which is one.
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Now, let's go ahead and calculate the other pieces of the formula.
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To calculate the other two pieces of the formula,
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you need to take into account cost per acquisition as well as average sales revenue.
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So, let's walk through these.
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So, the cost per acquisition is the CPR that we've calculated before.
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So, let's assume this to be $25.
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So, it takes about $25 of sales and marketing costs to get a need.
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The expected retention time is the amount of time
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which is measured in purchase cycles that you expect to retain the customer.
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I think we can aim a customer to stay with our business for, say seven years,
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when she say, think of our own experience as a grocery buyer and online shopper.
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So, this would be seven years,
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but since we need this in the purchase cycles as that is our unit.
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So, we're going to go seven years times 52.
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So, that's how I got this.
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So, this would be seven times 52 weeks per year,
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so that gives us 364 weeks across seven years.
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Average sales revenue is the average revenue we
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receive from the customer per transaction during the cycle.
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We calculate this above.
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This is $70 per cycle,
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so that's 70 here,
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and then profit margin per customer.
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The way to calculate this is average sale,
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which is $70 minus the average cost of sales.
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So, this would be where you can plug in the cost per acquisition,
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so over the average sales.
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So, this would be this minus this over 70.
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Okay. So, that's $0.64 on a dollar.
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That's the profit margin per customer.
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Now, we're ready to plug all of that in into the lifetime value formula.
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So, we're ready to plug in the values for the lifetime value now.
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So, this is going to be our average sale,
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which is 70 times number for peak sales,
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which is one times expected retention time,
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which is these number of weeks across seven years times the profit margin.
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So, 16,380 or the value that a customer would bring to a company.
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So, now that you know that an average customer value is 16,380,
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the company should spend less than this to obtain a new paying customer.
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It is spending more than this,
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the company may be making losses in the long run.
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One other thing, I have seen several equations for lifetime value.
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It is generally recommended to calculate lifetime value using a few different ways,
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so you can get a better estimate of your average lifetime value.
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We've provided a few links below for you to
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see what are the other ways to calculate lifetime value of a customer.
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