[jat850]

I don't fully agree with your math. Mine is potentially no better, but:

A single customer, spending $500/year on whatever it is you do, wherein you make 5% compounding profit off of their $500/year, nets $100,000 in 45 years. I feel that's a bit more realistic of an approach.

[corin_]

I wasn't taking interest into account in my example.

5% profit of $500/year is $25/year. I'm too lazy to work out compound interest over 45 years considering that a new $25 is being added each year, however:

45 * $25 = $1125

If you invested $1125 for 45 years at an interest rate of 4%, you'd end up with $6571. (And investing $1125 over 45 years gets you more back than only adding $25 a year to the investment.)

Obviously it's possible to do better than 4%, but I would suggest that, then, however you are investing the money is "how you are making money", not "having a lifelong customer".

So, have I completely misunderstood your example, or was your maths way way off?

[martinkallstrom]

His math is not off, I get about the same using http://www.moneychimp.com/calculator/compound_interest_calcu...

When he said 5% profit he meant 5% interest. Result depends on the figures you put in, but if you can get people to spend hundreds of dollars on your business every year of their life, you are probably in possession of a mechanism providing interest well over 12% or 15% annually. Which makes the value per customer much higher.

IKEA is one of the companies that successfully transformed the culture of one or several nations to their own benefit and routinely creates lifetime customers from infant to the grave.

[corin_]

Ah, assuming a profit of $500 does make the maths make sense.

But $500 profit a year from a single customer is way above the average for the majority of businesses.

[martinkallstrom]

So it follows that the majority of businesses does not make trillions of dollars either. :)

Still, there are several businesses that are making on average over $100-500/year profits on me. More or less my bank, car maker, gas station, energy company, furniture store, favorite soda brand, supermarket, fast food chain... what else? Scary thought.

[hessenwolf]

Your bank might not be. They are often just acting as a middle man and lending money to you that they borrowed from the bond market, taking the spread as their admin expenses.

[jat850]

I think my math was right (unless my compound interest calculator was wrong) but I did make a typo - the investment would have to be $600 per year at 5% compounding interest, not $500. Sorry 'bout that.

[ricaurte]

He would have had to assume a 15% rate of return in order to yield $100,000.

[shawndrost]

By that logic, a customer whose NPV is $100 is "worth" $13150.