Hello Essay

948 Words Jan 9th, 2013 4 Pages
Lifetime Value Lifetime value (LTV) is calculated initially for groups (segments) of customers. Once determined, it can be attributed back to individual members of the group. To understand LTV, let’s look at a typical lifetime value table calculated for a group of 50,000 bank customers who have the same credit card performance as that shown by the previous example. Year 1 6.0% Year 2 8.0% 3,000 Year 3 10.0% 3,240

a Referral Rate b Referred Customers c Retention 75.0% 80.0% 85.0% Rate d Retained 37,500 32,400 Customers e Total 50,000 40,500 35,640 Customers g Revenue per $389.76 $429.76 $429.76 Customer h Total Revenue $19,488,000 $17,405,280 $15,316,646 I Direct Costs $256 j MaSS mARKETING Cost $80 k Marketing Costs $25 l Total Costs
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The direct costs (i) are the same ($256), but in addition we have the acquisition cost of $80 (j) and the annual marketing costs of $25 (k). We are showing three years here: Year 1, Year 2, and Year 3. Year 1 is not a calendar year. Instead, it is the "year of acquisition".

Year 2 is the year after acquisition, and Year 3 is the year after that. For these reasons, Year 1 may contain people who have been acquired in various years (such as 1995, 1996, and 1997). Year 2 would represent the performance of these people in their second year (1996, 1997 and 1998). The profit (m) is the total revenue minus the total costs. Particular attention should be paid to the Discount Rate (n). Discounting is required because we will be adding together profit generated in several different years. Future money is not as valuable as money in hand today. For this reason, if we are to add these amounts from various years together, we must discount future monies to give them values comparable to current money. The formula for the discount rate is: D = (1 + i )n i = the market rate of interest plus a factor for risk 1.0 = No Risk at All. 2.0 = There are serious risks from competition, obsolescence, declining market, terrorism, etc.

n = the number of years for which you have to wait If the market rate of interest is 7% and the risk factor is 2, then the discount rate in the third year is: D = (1 + .14)2 D = 1.30 Dividing the

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