I just built a new web app: Customer Lifetime Value
It was a good excuse to refine my jQuery skills and talk about an important metric: Customer Lifetime Value.
Gross LTV measures how much profit a single customer will contribute over the course of their life with the company. Net LTV is equal to Gross LTV minus the cost of acquiring the customer (e.g. through Adwords). If Net LTV is negative, the business will lose money... even at scale.
The calculator on the site is simple but LTV equations can be very nuanced and incorporate virality and time value of money.
Case Study: Last year I was building a financial model for a local entrepreneur. He was excited about his product and knew people would be willing to pay. We calculated the Net LTV and it came back negative. This was a critical discovery as it allowed us to rethink the business model before he spent time and money building the product. We thought through additional revenue streams and developed tactics to lower acquisition costs. When I recalculated Net LTV, the number was positive; the entrepreneur could build his product with confidence in the business model.
For more on LTV, check out these articles:
Avinash Kaushik's approach - includes spreadsheets.