The HBS Toolkit Lifetime Customer Value Calculator tool is designed to let the user estimate the cost of acquiring a customer and the Net Present Value (NPV) of that customer's 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.
For more detailed directions place your mouse above the red celltips located throughout the tool.
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 suggest the following directions to alter your settings:
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The Harvard Business School Toolkit is a suite of tools and information resources designed to provide a consistent source of high-quality analysis and electronic self-instructional resources. It was prepared originally to help HBS MBA students with case analysis at various stages in the course of their studies at the School.
The Toolkit includes self-instructional workbooks/tutorials designed to reinforce many of the fundamental concepts required for business analysis. In many cases they include lessons on how to use Microsoft Excel to analyze data. There are tools designed to be used with standard elements of business analysis, as well as advanced tools originally created for use with specific courses and cases.
Watch HBS Working Knowledge for more from the HBS Toolkit.
HBS Toolkit Standard Interface Conventions
The Harvard Business School Toolkit uses the following standard conventions for the web site user interface and spreadsheet models. The following conventions will help guide your use of the Tools.
As depicted in the screens above, most tools will contain: