Original subtitles

When you decide how to spend your marketing budget,

you want to focus on some of your best customers,

customers who will stay with you for the long-term,

who will continue to generate revenue for the company longer than say,

a customer who finds a cheaper deal somewhere else and leaves your website.

In other words, you want to identify your high-value customer,

so that you can focus on bringing in more of these customers.

Think of it this way: Your goal is for every dollar you spend on

your marketing efforts to give you a higher rate of

return and generate revenue multiple times over.

How do you go about doing that?

You use a business metric called lifetime value of a customer.

To calculate lifetime value,

let's cover a few key concepts.

Again, make sure you make a note of the terminology and definitions.

They are going to get slightly complicated,

but we will walk through each of them one by one.

So, keep in mind we want to be able to estimate how much revenue we can expect

to earn per customer as far into the future as we can.

To calculate this, we need to take into account a lot of

different metrics and data to create a single LTV metric.

First, purchase cycle is a time period that

depicts the general frequency with which your products are purchased.

At Udacity, if we start a new nano degree class every two weeks,

two weeks would be the purchase cycle.

Total sales revenue per cycle is the revenue

earned from all customers per purchase cycle.

Number of sales per purchase cycle is the number of

times your average customer buys during the purchase cycle.

Cost per acquisition, you've seen this before.

It's a total cost of marketing and sales divided by the number of new leads.

With me this far, feel free to pause the video or [inaudible] ,

review, and think about what I've said this far.

Next, we have expectation retention time.

This is the amount of time you expect to retain the customer.

This is measured in terms of purchase cycles,

what we covered right at the top of this list.

So, if we expect a customer to be retained for a year given a two-week purchase cycle,

then we have an ERT of about 26.

Average sales revenue is the revenue you earn from

the average customer per transaction during the cycle.

This is the total customer revenue divided by the number of purchases in the cycle.

Profit margin per customer is the percentage of sales that has turned into profits.

Again, feel free to pause the video here and process what I've covered this far.

Next, we have one last thing to do,

calculate the lifetime value.

Lifetime value is the average sale times the number of

repeated sales times expected retention time times profit margin.

Essentially, this is the net profit you can attribute to

the customer over the length of their relationship with the company.

Let's do this in Excel in the next video.