hello this is dr. adam jae bok in this short audio presentation we're going to talk about lifetime value of a customer so lifetime value or LTV is a relatively simple concept it's a it's an important concept because businesses need to understand how much an actual customer is worth most organizations can capture value from a customer beyond the very first sale there might be repeat purchases of the same product or service or accessories associated with that initial product or service or a cross selling of other products or services to that same customer so we're trying to understand what the total profit associated with a given customer is over the length of time that the customer interacts with the company so let's do an example because very often doing an example is much more clear than simply a long wordy explanation so here we have some sort of generic product which sells for $100 it costs us $75 to make it so therefore their product profit is $25 in addition there are supplies that the customer needs to use with this product so this could be something along the lines of a copy machine and toner or paper and the supplies then cost about $4 a month or the supplies are priced at $4 a month and it the ongoing supply sales have $2 profit per month which suggests that the cost to us is about $2 a month in addition the expected customer life of the product usage is three years or thirty six months and once this is all done there's no other impacts and and that's the end of the story so take a moment and see if you can figure out what the lifetime profit of one customer is to this organization I encourage you to pause the presentation here take a moment or two see if you can come to the right answer before we move on to take a look at how to actually solve this and then do another example so we can walk through this the calculations really quite simple the product profit itself is $25 as mentioned and the supplies profit for month is $2 which suggests that over the 36 months of the relationship this total supplies profit would be $2 per month times 36 months which would be then $72 so our total lifetime value of this average customer would be the $25 profit from the product and the $72 profit from the supplies for a total of $97 that's our total lifetime value for a given customer now in real finance we'd use a much more sophisticated process to work this out because a dollar tomorrow is not worth the same as a dollar today if this is of interest to you you might take a look at a couple of sources that talked about cost of capital or discounted cash flow these are a little more advanced topics in finance but you do not need to know them for this course but this idea that we would assess the total profit the value that's created by a customer is a critical insight for any organization but especially small entrepreneurial organizations that are trying to determine whether or not their business has a viable model that can be sustainable over time one key thing to recognize is is there's an important link between cost of customer acquisition khoka and lifetime value LTV remember khoka is the cost to acquire one customer and LTV is the total profit from that customer so together you'd have a rough idea of whether the business is viable do you see how I'm gonna explain it a little more detail but take a moment and see if you recognize how to do this it's really quite simple a viable business generally speaking has a cost of customer acquisition that's lower than the lifetime value of the customer in other words it costs you a certain amount of money to bring the customer in but having the customer is worth more than that on the other hand if your cost of customer acquisition is incredibly high higher than their lifetime value then you have a problem and your business is probably not viable let's ponder this so for example in the other presentation we took a look at a situation where there was a coca of $50 well if coca was $50 and the LTV is 97 do we have a viable business here the answer is it kind of looks like we do it costs us $50 to bring a customer in but the LTV is night of the lifetime of that customer is $97 so in other words every single customer that we can bring into the organization is worth about 47 dollars in total profits so to wrap things up I think you should do one more and in fact you have to because this is an assigned activity in the canvas quiz so here we're talking about a gym the gym initiation fee is nothing it's free to join the gym but it costs the gym a certain amount of money to bring someone in we have to give them a tour we have to enter their data their information into the data set our database I mean we have to kind of maybe we have them complete a small assessment to figure out what their fitness goals are and all of that costs us money in time and and so on and that costs us about twenty five dollars from then on the member pays ten dollars per month and we're going to pretend that's all profit that's you know probably not a great assumption but let's pretend it's all profit from there on out and on average for some reason our customers tend to stay for only about eighteen months and then they're gone with this information you should be able to calculate the lifetime value of a given customer and that's what you'll be required to do in the canvas quiz activity so take the time to do this make sure that you understand the connection between coca and lifetime value and you are well on your way to understanding some important aspects about what makes some business is viable or not here's final thoughts as you learn about a business you should be able to improve both numbers your coca and your LTV obviously you want to reduce your cost of customer acquisition and you want to increase your lifetime value so with things like a be testing learning to target more profitable customer types and coming up with ways to extend the customer lifetime and you've probably run into these kinds of things where if you say you're going to leave an organization that has a recurring fee they offer to reduce the fee or they'll waive the fee for a couple months to kind of give you a chance to try it out a little bit longer you want if at all possible to find ways to reduce the coca and increase the LTV these are fundamentally two of the most important metrics that you have in a start-up and investors care about them if you are running a venture starting a venture and you're looking for investment capital it is quite likely that your investors will ask you to walk you through the calculations that you're using to understand LTV and coca keeping in mind that if there's a lot of administrative fees if there's a lab administrative costs operational cost to run your company then in some cases your LTV will need to be much higher than coca in order to be sustainable in the long haul