The Math Behind “Lifetime Value of a Customer”

I once had someone ask me how it was profitable for ESports events to have such high payouts. And while there are a lot of intrinsic benefits to hosting big prestige in-person events, (look at those sold out stadiums!) the real financial reason boils down to the idea of the “Lifetime Value of a Customer”.

When little Timmy sees Daigo playing Street Fighter, Faker playing League, or some other pro crushing the competition, little Timmy might think, “that could be me someday”. So little Timmy goes out and buys a copy of the game they want to play. If that game costs $50, you might think the company needs to get 20,000 “little Timmy”’s to make up for a $1,000,000 prize pool, but it’s actually a lot smaller than that.

There will be more Street Fighters with new characters and League will put out new skins and all at a nice affordable price. So next time little Timmy spends $20 on their favorite franchise, that’s $70 towards the company that makes little Timmy’s favorite game.

When you are as big as Riot or Capcom, you’ll have a whole finance department who can run these numbers for you, but here are two of the variables that should go into the back-of-your-napkin budget math.

Cost of Customer: How much do YOU have to spend to get 1 new customer or user.

This will be a mix of marketing dollars and any other spend you do to acquire your fans
You want this LOW

Lifetime Value of a Customer: How much will, on average, that 1 customer spend with you over their lifetime as a customer.

We should also discount that full projected amount, because Time = Money. Money now is more valuable than money in the future. Some of this is what’s called “Future Value”, and takes into account Interest Rates, which we’ve talked about before here
You want this HIGH

This might seem like that joke where you walk into a business class by mistake and see “Revenue - Costs = Profit” scrawled on the white board and people furiously taking notes. But HOW you do this, especially on the indie scale, is more interesting. Just look here to find out how.

--- John