forentrepreneurs.com – Overview
The old formula that everyone uses for customer lifetime value (LTV)) –average gross profit per customer divided by churn – ceases to work properly when you have very long customer lifetimes and negative churn. LTV can become infinite, which clearly doesn’t reflect reality. This post offers a new way to calculate LTV based on discounted cash flow analysis that takes into account the risks associated with revenue that is far off in the future, and the time value of money. The resulting LTV can help companies better understand and manage their future revenue streams and it much more accurately reflects what an investor would pay for that future flow of cash.
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