Estimate feature or product value

1. What is your goal

One or a combination of:

• Increase value ($ in dollars)

• Increase customer base (% of increase)

• Optimize/Reduce cost ($ in dollars)

• Increase customer retention (% of increase)

2. Estimate the value

Before calculating the value, we need to establish a few facts to be used as parameters later.

Churn Rate

Churn Rate = (# of customer at start - # of customers at end) / # of customers at start

Average Customer Lifetime

Average Customer Lifetime = 1 / Churn Rate

Customer Lifetime Value

LTV = Average Customer Lifetime x Average Gross Profit Per Account

or

LTV = ARPA x Gross Margin % / Churn % (where ARPA is Average Revenue Per Account)

Example 1: Increase Value

Acme Inc had 200 customers at the start and 150 at the end of the period, 200 - 150 / 200 = 0.25, which gives a Churn Rate of 0.25 or 25%. The average customer lifetime is four years, and customers pay $50,000 annually for the service.

$200,000 ARPA x 40% Gross Margin / 25% Churn = $320,000.

The new feature is expected to increase ARPA by 5%.

$240,000 ARPA x 40% Gross Margin / 25% Churn = $384,000.

The feature increases the LTV by $64,000.