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We introduce the concept of Lifetime Value ("LTV").
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[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 customer's 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,
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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
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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?
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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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