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
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
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: