ukvalueinvestment Posted October 19, 2020 Share Posted October 19, 2020 Hey - I am trying to find a good lifetime value calculator - the attached is what I am after, but the output doesn't look 'right" For example, ARPA 500, Gross Margin 20%, Discount Rate 0, Churn 100% spits out a discounted residual value of 2680! How is that possible when customer churn is at 100%? https://tactyc.io/published/1729/ltv-calculation Assuming I am correct in saying this must be wrong, does anyone know where I can find a good one. Link to comment Share on other sites More sharing options...
D33pV4lue Posted October 22, 2020 Share Posted October 22, 2020 Instead of using a hypothetical scenario, what is the real scenario? Link to comment Share on other sites More sharing options...
ukvalueinvestment Posted October 22, 2020 Author Share Posted October 22, 2020 Sure. I'm actually looking at Naked Wines: ARPA: 197 Gross Margin: 27% Discount Rate: 8% Churn: 17% Link to comment Share on other sites More sharing options...
D33pV4lue Posted October 22, 2020 Share Posted October 22, 2020 what is the churn frequency? Link to comment Share on other sites More sharing options...
ukvalueinvestment Posted October 22, 2020 Author Share Posted October 22, 2020 I don't really know what you mean. Is that not a derivative of the churn (17%)? Link to comment Share on other sites More sharing options...
D33pV4lue Posted October 22, 2020 Share Posted October 22, 2020 is that % monthly, quarterly or yearly Link to comment Share on other sites More sharing options...
ukvalueinvestment Posted October 22, 2020 Author Share Posted October 22, 2020 Annually Link to comment Share on other sites More sharing options...
D33pV4lue Posted October 22, 2020 Share Posted October 22, 2020 A for simple calculation of LTV you need the reciprocal of churn. So in this case, 17% means that on average each customer stays with Naked wines 5.88 years (1/.17). Average revenue is 197 per year so on average the LTV = 5.88*197= 1,158.82. Now you could go further and use a discount rate on the revenue and include gross margin or operating margin for total lifetime profit. For simplicity, let's say 6 years is the average customer lifespan. you would discount 197 each year. Sum= $925 year 1 = 197 year 2 = 168 year 3 = 156 year 4 = 144 year 5 = 134 year 6 = 124 does that help? Link to comment Share on other sites More sharing options...
ukvalueinvestment Posted October 29, 2020 Author Share Posted October 29, 2020 Thanks but shouldn't churn be calculated on the previous year's sales not the 1st year's sales? Link to comment Share on other sites More sharing options...
D33pV4lue Posted October 29, 2020 Share Posted October 29, 2020 Sorry I am a bit confused about what you are asking. I just used the number that you provided me in a very simple calculation of how to apply it. The point of churn is to determine on average how long a customer will stay with the company. If you sign up 100 people in year 1 with a 50% retention rate after the first year but a 10% churn after year 1 then you need to factor that into the equation. If revenue per customer increases/decreases (on an annual basis) with the # of years they stay on then you have to factor that in. Link to comment Share on other sites More sharing options...
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