Download Direct Marketing LTV Sum Solution

Direct Marketing LTV Sum Solution
Note: The only formula you have to remember is lifetime value of a customer (LTV)!
In the sum, you would be given several sources of a firm’s income and expenses - all mixed
up - for a certain number of years. Remember to always write the first year mentioned in the
sum as the ZEROTH (0th) YEAR AND NOT THE FIRST YEAR. For example, if you have
years from 2000-04, then 2000 will be the zeroth year and 2001 will be the first year and so
on.
Before starting the sum, make two columns ‘Income’ and ‘Expenses’ and list out the names
of the incomes and expenses under each of them.
Step 1 –You have to club them together, first the income (say under column A) and then the
expenses (say under column B), then subtract the total of B from that of A. That gives you
your total contribution [C] for each year:
Total contribution (yearly) = Total income – Total expenses
Step 2 – Take the decimal form of the interest rate, like 10% is 10/100 and therefore 0.1.
Then add 1 to it (1+0.1=1.1)
Raise that to the power of each year (starting from zero). In the above example,
2000 (year zero) =1.10=1 (the result of any number to the power of zero is 1)
2001 (first year) =1.11=1.1
2002 (second year) =1.12=1.1x1.1=1.21
2003 (third year) =1.13=1.1x1.1x1.1=1.331 or 1.33
2004 (fourth year) =1.14=1.4641 or 1.46
Round off the results to two decimal points, like 1.331=1.33.
Find this for each year.
Step 3 – Using the values you just found, apply the formula and get the LTV
LTV= Ci /(1+d)n
Where Ci is the contribution for that particular year,
i is the number of years,
d is the discount/interest rate or the cost of capital incurred by the company.
Basically you have to take the contribution for that year, and divide it by the corresponding
figure for that year which you found in step 2. That will give you the lifetime value for that
particular year.
So if your contribution for year zero (2000) is Rs 5,000, and in step 2 you found the figure
for year 2000 to be 1, then the lifetime value for year 2000 will be 5000/1=Rs. 5,000
Step 3 – Add the LTV values of all years and you will find the total customer lifetime value.
Example:
Given:On 31st March
2004
2005
2006
2007
2008
Sales
---
15,000
27,000
35,000
50,000
Referrals
---
3,000
5,000
8,000
12,000
Telemarketing
4,000
8,000
10,000
15,000
17,000
Discount
---
1000
2000
4000
6000
The rate of interest being paid by the company on loans is 10%
Solution:
Life Time Value=LTV= Ci / (1+d)n
where
Ci=net contribution for the year i
i=number of years of an existing customer or an expected customer
D=discount rate, interest rate, cost of capital
Here;
D=10% - Given
Decimal form of the interest rate = 10% is 10/100 = 0.1
On march 31st
2004
2005
2006
2007
2008
Sales
-
15,000
27,000
35,000
50,000
(+)Referrals
-
3,000
5,000
8,000
12,000
Total Income (I)
-
18000
32000
43000
62000
Telemarketing
4,000
8000
10000
15000
17000
(+)Discounts
-
1000
2000
4000
6000
Total Expense (E)
4,000
9000
12000
19000
23000
Contribution (I-E)
-4,000
9000
20000
24000
39000
LTV= Y0 + Y1 + Y2 + Y3 + Y4
=
-4000/(1+0.1)0 + 9000/(1+0.1)1 + 20000/(1+0.1)2 + 24000/(1+0.1)3 + 39000/(1+0.1)4
= -4000 + 9000/1.1 + 20000/1.21 + 24000/1.33 + 39000/1.46
= -4000 + 8181.81 + 16528.92 + 18045.11 + 26712.32
= 65468.16