What is Lifetime Value Analysis?3:19 with Michael Watson
We introduce the concept of Lifetime Value ("LTV").
[MUSIC] 0:00 Welcome back. 0:04 Let's get started with the second section of our course, introducing churn and 0:06 lifetime value analysis. 0:10 LTV is an acronym that stands for lifetime value. 0:13 What does LTV mean? 0:16 In very simple terms, it means how much money we get from a particular customer. 0:18 This is usually based on a type or segment of customers, not an individual customer. 0:24 LTV is the value of a customer to our business 0:30 over the lifetime of our relationship with that customer. 0:33 This is dollars and cents value, not something intangible like 0:37 the happiness we get after seeing the customer everyday. 0:41 That's definitely something wonderful that we can value personally, but 0:44 that's not typically something we try to capture with LTV calculations. 0:48 Let's explore some examples. 0:53 Maybe we own a grocery store, or stores, and 0:55 are interested in determining what an average customer's worth to us. 0:58 Some people might just look at individual transactions, but 1:02 it's also meaningful to look at all the transactions we have with an individual 1:06 customer, or type of customer, over their lifetime. 1:10 Indeed, these are completely separate things. 1:14 The former is our average transaction value across 1:18 all our customer transactions. 1:21 The latter is the sum of our average customers transactions 1:23 over their lifetime, or their LTV. 1:28 Maybe by looking at the LTV's of different customer groups we see that customers 1:31 who are mothers spend $40 more per week than our average student customer. 1:37 Over the year, 1:42 the average mom is worth $2,080 more to us than the average student. 1:43 That starts to add up if it continues over the years. 1:49 All else equal, a customer's lifetime value, 1:52 should increase over time as they purchase more and more stuff from us. 1:55 Let's talk about another example. 2:00 A mobile phone plan. 2:02 Perhaps we have a contractual obligation of two years or 2:04 maybe we pay month to month with no lock in. 2:08 With the contractual obligation, and 2:11 assuming there is no option to cancel, our mobile phone provider 2:13 knows that we will have an LTV of at least those two years of fees. 2:17 In the month to month situation predicting the LTV of the customer becomes 2:22 more difficult because the customer has the opportunity 2:26 to stop paying the provider every month. 2:30 In the contractual situation sure we know we get at least two years, but 2:32 how often do customers renew at the end of those two years? 2:37 Some of you may be wondering how we define value here. 2:41 Is it cash or revenue you collect from a customer, or is it profit? 2:46 Also, if LTV means the amount of money we get from a customer 2:50 over their lifetime of our relationship with that customer, 2:54 isn't that an ongoing potentially always changing number? 2:58 These are great questions, and we'll unpack them in this section of the course. 3:01 Now, if you're thinking to yourself right now, Michael, what are you talking about? 3:07 Don't worry if you're confused. 3:12 Similar to section one, we're gonna walk through several examples, and 3:14 get you up to speed in no time. 3:17
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