Harvard Business School Working Knowledg e Archive

HBS Toolkit - Lifetime Customer Value Calculator

4/4/2000
How do you measure the value of a customer or group of customers to a company? This downloadable interactive workbook, one of several workbooks/tutorials from the HBS Toolkit used by Harvard Business School students, is designed to help estimate the cost of acquiring a customer and the Net Present Value (NPV) of that customer's business during his or her economic life.
(Lifetime Customer Value Calculator)
 

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.

Download the Lifetime Customer Value Calculator tool

Directions for Using the Lifetime Customer Value Calculator

The toolkit uses a series of standard interface conventions for spreadsheet models and other documents.

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:

  1. Double-click My Computer.
  2. On the View menu, click Options (or Folder Options).
  3. Click the File Types tab.
  4. In the Registered File Types box, click the specific Office document type (for example, Microsoft Excel Worksheet), and then click Edit.
  5. In Internet Explorer 3.01, 3.02, or 3.02a, click the Open Web Documents In Place check box to clear it. In Internet Explorer 4.0, 4.01, or 5, click the Browse In Same Window check box to clear it.NOTE: This check box is not available if you are running Internet Explorer version 3.0. If you are running Internet Explorer 3.0, upgrade to Internet Explorer 3.02 or later. For information about obtaining the latest version of Internet Explorer, visit the Microsoft Web site.

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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.

The HBS Toolkit

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.

standards

As depicted in the screens above, most tools will contain:

     yellow cell      hbs menu