1. Step 17: Calculate LTV of an Acquired Customer

2. Key Inputs to Calculate LTV How to Calculate LTV
Outline
Overview
Key Inputs to Calculate LTV
How to Calculate LTV
Important Considerations
Workshop
November 26, 2018

3. LTV – Lifetime Value of an Acquire Customer This step:
Overview
LTV – Lifetime Value of an Acquire Customer
This step:
Add up revenue expected from a single customer
Discount revenue based on how much it’ll cost to repay investors over time
November 26, 2018

4. LTV is fundamental checkpoint for venture’s viability
Overview
Now we do the math aka “unit economics” to determine if venture is sustainable
LTV and COCA will help determine how profitable your venture is in beachhead market
LTV is fundamental checkpoint for venture’s viability
November 26, 2018

5. Expensive example? Pets.com 1998 Web pet store
Overview
Expensive example? Pets.com
1998
Web pet store
Aggressive advertising (e.g., super bowl)
Acquired customers but did NOT analyze unit economics
Issue: low margin on products + high cost for ads
No clear path to increase LTV and decrease COCA
Company was liquidated, $300M in investments lost
November 26, 2018

6. Key Inputs to Calculate LTV How to Calculate LTV
Outline
Overview
Key Inputs to Calculate LTV
How to Calculate LTV
Important Considerations
Workshop
November 26, 2018

7. Key Inputs to Calculate LTV
Need to calculate LTV of average customer
Not a precise number
Not correct the first time (most likely)
More important:
Understand drivers beyond LTV
Analyze underlying factors needed to increase LTV over time
LTV is more than just a number!
November 26, 2018

8. Key Inputs to Calculate LTV
One-time Revenue Stream
Recurring Revenue Stream
Additional Revenue
Gross Margin for Each Revenue Stream
Retention Rate
Life of Product
Next Product Purchase Rate
Cost of Capital Rate
November 26, 2018

9. Key Inputs to Calculate LTV
One-time Revenue Stream
Up-front price for product
Recurring Revenue Stream
Subscriptions / maintenance fees
Repeated purchases of consumables
Additional Revenue
Upsell other products
Penalty fees
November 26, 2018

10. Key Inputs to Calculate LTV
Gross Margin for Each Revenue Stream
Price of Product minus costs to make product
Costs do NOT include:
Sales and marketing (COCA)
Overhead from R&D
Administrative expenses (e.g. travel, legal, HR, etc.)
November 26, 2018

11. Key Inputs to Calculate LTV
Retention Rate
% of customers who continue to pay recurring fee
Monthly or yearly rate
Churn Rate
Opposite of retention rate
% of customers you lose
Include early termination of contracts
November 26, 2018

12. Key Inputs to Calculate LTV
Life of Product
Length of time expected for product to last
Customer will need to purchase replacement or discontinue
Next Product Purchase Rate
% of customers who buy replacement product from you
November 26, 2018

13. Key Inputs to Calculate LTV
Cost of Capital Rate
Yearly rate
Cost to get money from investors
Investors charge premium for their services
Usually 35 – 75% interest
Assume 50% interest rate in your LTV…
November 26, 2018

14. Key Inputs to Calculate LTV How to Calculate LTV
Outline
Overview
Key Inputs to Calculate LTV
How to Calculate LTV
Important Considerations
Workshop
November 26, 2018

15. PresentValue = Profit * ( 1 – CostOfCapitalRate)t
How to Calculate LTV
LTV expressed in dollars per customer
Will estimate LTV for first five years
Formula:
PresentValue = Profit * ( 1 – CostOfCapitalRate)t
t: is number of years
November 26, 2018

16. Rule of thumb: LTV should be 3 times COCA
How to Calculate LTV
LTV by itself is not very telling
Need COCA as well
Rule of thumb: LTV should be 3 times COCA
November 26, 2018

17. Key Inputs to Calculate LTV How to Calculate LTV
Outline
Overview
Key Inputs to Calculate LTV
How to Calculate LTV
Important Considerations
Workshop
November 26, 2018

18. Important Considerations
Many secondary factors in LTV:
Business model can affect LTV
LTV is about profit, not revenue
Overhead isn’t negligible
Gross margins make a big difference
Retention rates are very important
Find additional opportunities for upselling
November 26, 2018

19. Important Considerations
Business model can affect LTV
One-time vs. recurring payments?
LTV is about profit, not revenue
Gross margins and cost of capital rates are critical!
November 26, 2018

20. Important Considerations
Overhead isn’t negligible
Overhead excluded from LTV
3:1 LTV to COCA ratio accounts from this
Gross margins make a big difference
Consider wrapping low-margin core w/ high-margin add-ons
Will boost LTV
November 26, 2018

21. Important Considerations
Retention rates are important!
Longer you keep customer, better the LTV
Be realistic, try not to overestimate
Find additional opportunities for upselling
Can improve profits
November 26, 2018

22. Key Inputs to Calculate LTV How to Calculate LTV
Outline
Overview
Key Inputs to Calculate LTV
How to Calculate LTV
Important Considerations
Workshop
November 26, 2018

23. Goal: estimate how much new average customer is worth to venture
Workshop
Goal: estimate how much new average customer is worth to venture
Not known LTV w/ precision
Essential to understand order of magnitude
What drives profitability?
Initial sale?
Consumables?
Retention?
Gross margin?
Volume?
Etc
November 26, 2018

24. Cost of capital (interest rate for loans, e.g., 50%)
Workshop
Inputs to LTV (again)
One-time revenue
Recurring revenue
Other revenue
Gross margins
Retention rate
Life of product
Repurchase rate
Cost of capital (interest rate for loans, e.g., 50%)
November 26, 2018

25. LTV tells you profitability
Workshop
LTV tells you profitability
How much you will make by acquiring one more customer
Minus margin costs (parts + labor)
Does not include marketing or sales (COCA)
Does not include R&D
Does not include administrative expenses (legal, travel, rent)
WORKSHEET: LTV
November 26, 2018