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Lifetime value is the net present value of profit that your company can earn from a typical customer over a specified number of years. This value depends on a number of factors, some of which are under your control. These factors include:

1.  The natural "lifetime" of customers (in years): For most businesses, it is reasonable to expect customers to return for many years.

2.  Retention rate (per year): This is the percentage of this year's customers who will return in the following year. All things being equal, the lifetime value of a group of customers increases with retention rate.

3.  Profit margin (sales minus costs) per year: The larger the amount of profit earned from a group of customers per year, the greater their lifetime value over the years.

4.  Referral rate: Customers who refer others to your business regularly will have a greater lifetime value than those who don't.

5. Annual inflation: Lifetime value is the net present value of potential profit you can earn from customers in the future. It follows that the higher the inflation rate, the lower the present value of future income. Whereas inflation may not be a big factor in the short term, its impact on lifetime customer value can be substantial over a long period of time.

This page helps you calculate the lifetime value of 1,000 new customers over a 3-year period. To do so, simply fill in the following pieces of information:

The average yearly sale to a typical new customer during the first year is $% of this amount is cost (include all costs, such as operating costs, material costs, advertising costs, etc).

% of  this year's customers will likely return the following year (year 2).  The average yearly sale to a typical second-year customer is $% of this amount is cost.

Among those customers who return in Year 2, % will return during Year 3.   The average yearly sale to a typical third-year customer is $% of this amount is cost.  

The annual referral rate is %. (i.e.: how many new customers can you get for every 100 existing customers through their referral?)

The anticipated annual inflation rate over the next 3 years for your business is %.


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