HBS Toolkit

HBS Toolkit License Agreement

Harvard Business School Publishing (the Publisher) grants you, the
individual user, limited license to use this product. By accepting and
using this product, you agree to the terms of service described below.
Terms
You accept that this product is intended for your use, and you will not
duplicate in any form or manner, electronic or otherwise, copies of this
product nor distribute this product to anyone else.
You recognize that the product and its content are the sole property of the
Publisher, and that we have copyrighted the product.
You agree that the Publisher is not responsible for any interruption of
service or malfunction that is a consequence of the Internet, a service
provider, personal computer, browser or other software or hardware
components. You accept that there is no guarantee that this product is
totally error free. You further understand and accept that the Publisher
intends to provide reliable information but does not guarantee the accuracy
or completeness of any information, and is not responsible for any results
obtained from the use of such information.
This license is effective until terminated, when the license or subscription
period ends without renewal, or when you destroy this product and any
related documentation. The Publisher may terminate your license without
notice if you fail to comply with the conditions set forth in this
agreement, and may pursue any other legal recourse.

Copyright 1999 President and Fellows of Harvard College

LICENSE AGREEMENT

Lifetime Customer Value Calculator

Contents
Introduction
Basic Model-Assumptions
Basic Model-Calculations
Complex Model-Assumptions
Complex Model-Calculations

INTRODUCTION

This sheet
Inputs for basic LTV model
Output report for basic LTV model
Inputs for complex LTV model
Outputs for complex LTV model

Overview
The LVC tool is designed to let the user estimate the cost of acquiring a customer and the NPV of that
customers business during his useful economic life. Two models are offered a simple one that
looks at a single product and somewhat simplified assumptions, and a more complex model that
allows the user to examine multiple products with distinct customer loyalty and repurchase
characteristics.
The models assume that customer acquisition is done through a spending program that could include
advertisements, special discount coupons or giving out of free samples. The user must make some
assumptions about how much it costs the company to reach each potential customer as well as what
percentage of customers reached will make an initial purchase. If there are additional costs (such as
a rebate) that only apply to actual customers, those are also calculated. This provides a total cost per
acquired customer.
The customer value calculation is similar to a perpetuity function. At each potential repurchase period,
the user must estimate how many existing customers will continue to buy, a percentage known as
Retention Rate. After adjusting for price inflation, this gives us all the components we need for the
perpetuity formula. In the simple model the customer is considered to have an infinite economic life,
although this is not too great a distortion unless retention rates are extremely high. (Even at 80%
retention, a customer is almost 90% used up after just ten years.)
In the complex model, the user can assign a specific useful economic life to a customer, set multiple
retention rates for different years, and look at the value of a customer for a company with multiple
products. The calculation page then separates the profitability of the customer on an annual basis and
by product, as well as breaking up customer present value by product.

Directions
For more detailed directions place your mouse above the red celltips located throughout the
tool. See this example -->
You may want to print these directions as a reference guide for this tool. You can do this by selecting
Print Sheet with Celltips from the HBS Menu
To start using the tool, remove the sample data from the tool using the Show/Hide Sample Data option
under the HBS Menu

Note About Using Internet Explorer

The default setting in Internet Explorer is to open these tools in the Explorer application instead
of Excel. We recommend against this and provide directions in the Help section of the HBS
Toolkit web site to change this default behavior.

HBS Menu
Show/Hide Sample Data:
Show Calculator:
Show/Hide Celltips:
Print Sheet with Celltips:
Set Zoom:
Visit Web Links:
About HBS Toolkit:

Displays or removes sample entries

Launches Windows calculator
Toggles in/out red Celltips in documented cells
Prints Celltip documentation on current sheet
Provides quick access to 80%, 100%, and 125% zoom levels
Links to HBS Toolkit website, Toolkit Glossary, and Toolkit
Feedback, as well as HBS and HBS Publishing web sites
Launches the about box for the HBS Toolkit

Jon B. DeFriese MBA `00 and Chad Ellis, MBA `98 developed this software under the supervision of Professor
Steven Wheelwright as the basis for class discussion rather than to illustrate either the effective or ineffective
handling of an administrative situation.
Copyright 1999 President and Fellows of Harvard College

Lifetime Customer Value Calculator

Assumptions
Time between purchases (years)
Retention Rate per Period
Average Purchase Value
Profit Margin
Profit per Purchase
Discount Rate per year
Product Inflation per year
Cost of Reaching a Potential Customer
Response Rate
Cost of Attracting a Customer
Coupon or other one-off costs
Total Customer Acquisition Cost

$
$

$
$
$
$

3
80%
50.00
25%
12.50
12%
3%
0.50
10%
5.00
8.00
13.00

Copyright 1999 President and Fellows of Harvard College

BASIC MODEL
-ASSUMPTIONS

sample1

Page 4

sample1

3
0.8
50
0.25
0.12
0.03
0.5
0.1
8

Page 5

Lifetime Customer Value Calculator

Calculations
Years per Period
Retention Rate
Inflation per Year
Discount Rate per Year
Change in value of customer purchase per period
Discount Rate per Period
Net Present Value of Customer Purchase Stream
Cost of Acquiring a Customer
Net Present Value of Acquiring a Customer

3
80%
3%
12%
-13%
40%
$
$
$

Copyright 1999 President and Fellows of Harvard College

23.55
13.00
10.55

BASIC MODEL CALCULATIONS

Lifetime Customer Value Calculator

Years of Customer Life

Annual Discount Rate

Initial Purchase Price

Annual Product Inflation
Margin per Product
Retention Rate Year 1
Retention Rate Later Yrs.
Years between Purchase

12%

Item 1
100.00 $
3%
20%
75%
60%
3

Item 2
30.00 $
5%
18%
80%
65%
1

Copyright 1999 President and Fellows of Harvard College

Item 3
50.00
3%
22%
90%
75%
2

COMPLEX MODEL ASSUMPTIONS

sample2

0.12

100
0.03
0.2
0.75
0.6
3

Page 8

sample2

30
0.05
0.18
0.8
0.65
1

50
0.03
0.22
0.9
0.75
2

Page 9

Lifetime Customer Value Calculator

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

$
$
$
$
$
$
$
$

Item 1
$22.24
Total NPV

Value of Purchase
Item 1
Item 2
100.00 $
30.00
$
31.50
$
33.08
109.27 $
34.73
$
36.47
$
38.29
119.41 $
40.20
$
42.21

Net Present Value

Item 2
$13.79

$
$
$
$
$
$
$
$

Item 3
50.00
53.05
56.28
59.70
-

Margin of Purchase
Item 1
Item 2
Item 3
20%
18%
22%
20%
18%
22%
20%
18%
22%
20%
18%
22%
20%
18%
22%
20%
18%
22%
20%
18%
22%
20%
18%
22%

Item 1
75%
60%
60%
60%
60%
60%
60%
60%

Retention Rate
Item 2
Item 3
80%
90%
65%
75%
65%
75%
65%
75%
65%
75%
65%
75%
65%
75%
65%
75%

Item 3
$19.36

$55.39

Copyright 1999 President and Fellows of Harvard College

COMPLEX MODEL CALCULATIONS

Item 1
100%
75%
45%
27%
16%
10%
6%
3%

Survival Rate
Item 2
100%
80%
52%
34%
22%
14%
9%
6%

Item 3
100%
90%
68%
51%
38%
28%
21%
16%

$
$
$
$
$
$
$
$

Profit per Acquired Customer

Item 1
Item 2
Item 3
20.00 $
5.40 $
11.00
$
4.54 $
$
3.10 $
7.88
5.90 $
2.11 $
$
1.44 $
4.70
$
0.98 $
1.39 $
0.67 $
2.81
$
0.46 $
-