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It helps to look at the basic CLV model in two components.
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One is called The shuttle margin,
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which is the margin you get each period.
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In the Netflix case it would be a month.
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So that would be M-R. And then the CLV formula
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multiplies this M-R by something called a long term multiplier.
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Think of the long term multiplier as the expected lifetime, right.
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So you multiply a short term recurring margin with the number of periods it recurs.
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That would be the long term multiplier R,
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the lifetime expected lifetime of the customer.
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So now, we've got to kick the tires a little
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bit and see whether this formula makes sense.
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So how do we do that?
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Let's think about what happens to the long term multiplier if retention rate increases.
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So if retention rate goes up what happens to the long term multiplier?
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Think about that, take a few minutes and I'll be back.
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So, did you figure it out?
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What happens to the long term multiplier if retention rate increases?
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How does the discount rate change?
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That was a trick question.
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It does not change.
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Discount rate stays the same.
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What happens to the long term multiplier?
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Now, this we have to think about.
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So if retention rate is higher, this term,
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the denominator goes down,
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which means the long term multiplier goes up.
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So does that make intuitive sense?
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If a person is retained for longer,
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that is if the retention rate goes up,
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you would think their expected lifetime to go up, which makes sense.
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If their expected lifetime goes up,
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should their customer lifetime value go up too?
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Yes. The formula says it goes up and it makes intuitive sense.
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So this is a way to kind of look through the formula you know,
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see what happens to the formula if you adjust some of these variables.
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What happens if retention increases?
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What happens to the long term multiplier CLV?
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Does it make intuitive sense?
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It makes. So it seems like the formula is working.
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Now what we're going to do after a few minutes
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is work through some real numbers examples on the CLV formula.