HBS Toolkit License Agreement

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Copyright 1999 President and Fellows of Harvard College
HBS Toolkit
LICENSE AGREEMENT
Contents
Introduction This sheet
Basic Model-Assumptions Inputs for basic LTV model
Basic Model-Calculations Output report for basic LTV model
Complex Model-Assumptions Inputs for complex LTV model
Complex Model-Calculations 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: Displays or removes sample entries
Show Calculator: Launches Windows calculator
Show/Hide Celltips: Toggles in/out red Celltips in documented cells
Print Sheet with Celltips: Prints Celltip documentation on current sheet
Set Zoom: Provides quick access to 80%, 100%, and 125% zoom levels
Visit Web Links: Links to HBS Toolkit website, Toolkit Glossary, and Toolkit
Feedback, as well as HBS and HBS Publishing web sites
About HBS Toolkit: 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
INTRODUCTION
Assumptions
Time between purchases (years) 3
Retention Rate per Period 80%
Average Purchase Value 50.00 $
Profit Margin 25%
Profit per Purchase 12.50 $
Discount Rate per year 12%
Product Inflation per year 3%
Cost of Reaching a Potential Customer 0.50 $
Response Rate 10%
Cost of Attracting a Customer 5.00 $
Coupon or other one-off costs 8.00 $
Total Customer Acquisition Cost 13.00 $
Copyright 1999 President and Fellows of Harvard College
Lifetime Customer Value Calculator
BASIC MODEL -
ASSUMPTIONS
Calculations
Years per Period 3
Retention Rate 80%
Inflation per Year 3%
Discount Rate per Year 12%
Change in value of customer purchase per period -13%
Discount Rate per Period 40%
Net Present Value of Customer Purchase Stream 23.55 $
Cost of Acquiring a Customer 13.00 $
Net Present Value of Acquiring a Customer 10.55 $
Copyright 1999 President and Fellows of Harvard College
Lifetime Customer Value Calculator
BASIC MODEL -
CALCULATIONS
Years of Customer Life
Annual Discount Rate 12%
Item 1 Item 2 Item 3
Initial Purchase Price 100.00 $ 30.00 $ 50.00 $
Annual Product Inflation 3% 5% 3%
Margin per Product 20% 18% 22%
Retention Rate Year 1 75% 80% 90%
Retention Rate Later Yrs. 60% 65% 75%
Years between Purchase 3 1 2
Copyright 1999 President and Fellows of Harvard College
Lifetime Customer Value Calculator
COMPLEX MODEL -
ASSUMPTIONS
Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Item 1 Item 2 Item 3
Year 1 100.00 $ 30.00 $ 50.00 $ 20% 18% 22% 75% 80% 90% 100% 100% 100% 20.00 $ 5.40 $ 11.00 $
Year 2 - $ 31.50 $ - $ 20% 18% 22% 60% 65% 75% 75% 80% 90% - $ 4.54 $ - $
Year 3 - $ 33.08 $ 53.05 $ 20% 18% 22% 60% 65% 75% 45% 52% 68% - $ 3.10 $ 7.88 $
Year 4 109.27 $ 34.73 $ - $ 20% 18% 22% 60% 65% 75% 27% 34% 51% 5.90 $ 2.11 $ - $
Year 5 - $ 36.47 $ 56.28 $ 20% 18% 22% 60% 65% 75% 16% 22% 38% - $ 1.44 $ 4.70 $
Year 6 - $ 38.29 $ - $ 20% 18% 22% 60% 65% 75% 10% 14% 28% - $ 0.98 $ - $
Year 7 119.41 $ 40.20 $ 59.70 $ 20% 18% 22% 60% 65% 75% 6% 9% 21% 1.39 $ 0.67 $ 2.81 $
Year 8 - $ 42.21 $ - $ 20% 18% 22% 60% 65% 75% 3% 6% 16% - $ 0.46 $ - $
Item 1 Item 2 Item 3
$22.24 $13.79 $19.36
Total NPV $55.39
Survival Rate Profit per Acquired Customer
Net Present Value
Value of Purchase Margin of Purchase Retention Rate
Copyright 1999 President and Fellows of Harvard College
Lifetime Customer Value Calculator
COMPLEX MODEL -
CALCULATIONS