Formula Using Retention Rate - Am I thinking this through correctly?

[sammysrefuge]

I need help making sure I am doing this right...

I am trying to solve for the total Lifetime Value of a member where I deduct their initial order from the total.

Variables:

A = # of members
B = 42% retention rate
C = \$750 lifetime spend
D = \$48 initial order

Total Lifetime Value = ABC - ABD (I know I can reduce this to AB(C-D) but I want to keep it easy for now.)

The "ABC" portion calculates the Lifetime Value portion.
The "ABD" portion is supposed to calculate the Initial Order amount that I need to deduct from the Lifetime Value.

Here is the part that has me questioning myself. Since the retention rate is only 42%, I would want to calculate the value of the initial order, which I am deducting in the second part of the equation, by taking the number of members * the initial order * .42. Correct? I am just questioning whether the second part of the equation should be "ABD" or just "AD"...

Can anyone help? If it is "ABD", can you help me understand why?

I really appreciate your help!

 

[jvicens]

Hi there,

I understand your need for accuracy and clarity in your calculations. Based on the information provided, it seems like you are on the right track with your equation. However, there are a few things to consider.

Firstly, when calculating the Lifetime Value, it is important to take into account the retention rate. This means that not all members will continue to spend the full \$750 over their lifetime, so the equation should be adjusted accordingly. It should be: Total Lifetime Value = ABC * B - ABD.

Secondly, the second part of the equation should indeed be "ABD" instead of just "AD". This is because you are trying to calculate the value of the initial order that needs to be deducted from the Lifetime Value. By using "ABD", you are taking into account the number of members, the initial order amount, and the retention rate.

To understand why this is the case, let's break down the equation. "AB" represents the total number of members multiplied by the retention rate. This gives us the number of members who will continue to spend over their lifetime. "C" represents the average lifetime spend of a member. So, "ABC" gives us the total amount of revenue generated by these members over their lifetime. However, not all of this revenue is profit, as we need to deduct the cost of the initial order. This is where "ABD" comes in. By multiplying the number of members, the initial order amount, and the retention rate, we get the total cost of the initial orders that need to be deducted from the Lifetime Value.

I hope this helps clarify things for you. Let me know if you have any further questions or need additional assistance. Good luck with your calculations!