Creating a Customer Lifetime Value Measurement Framework

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Customer Lifetime

Customer lifetime value (CLV) is the total profit or revenue that a customer generates over their lifetime. Companies need to understand their customer lifetime value because it helps them make better business decisions. If they can measure how much each customer is worth to them over time, they can figure out when it makes sense to invest in creating new products or services or investing in other areas of their business.

Determine the average revenue generated per customer

The average revenue generated per customer (ARPU) is the average revenue generated by a single customer over their entire relationship with your business. It’s calculated by dividing the total revenue generated by total customers:

ARPU = Total Revenue / Number of Customers

The average lifetime value of a customer (LTV) is the average revenue generated per customer throughout their lifetime with you. It’s often expressed in $s, but can also be expressed as a percentage of your ARPU:

LTV = Total Revenue Generated / Number Of Customers x Years Served

Calculate gross margin per customer

Gross margin per customer is the difference between revenue and cost of goods sold. This is calculated by dividing revenue by the cost of goods sold. Cost of goods sold (COGS) includes direct costs and indirect costs. Direct costs are those that are directly attributable to a specific product or service. Indirect costs, on the other hand, don’t have a direct link to any particular product or service but are still necessary for running your business. The formula for calculating COGS looks like this:

  • Cost Of Goods Sold = Direct Costs + Indirect Costs

Find the average number of years a customer remains a loyal customer

As a rule of thumb, the longer a customer stays with your brand and the more value they receive from it, the higher their CLTV will be. The average number of years a customer remains loyal to your brand is one indicator that can help you calculate CLTV. You’ll want to know this because it will help you determine how much each customer is worth to your business and also whether or not any changes made to improve customer retention rates have been successful.

It’s important not only for you as an entrepreneur but also for your employees and colleagues who are responsible for communicating with customers about how long they’ve been using your products/services (e.g., phone reps). Knowing such information will enable them to better provide excellent service during each interaction with these valuable customers.

Determine your retention rate – customers who renew each year

To determine your retention rate, simply ask: “Of your customers who renewed their contracts this year, how many of them renewed last year?” This is a key metric for determining CLTV because it measures customer loyalty. It also indicates whether or not your company will be able to keep a full roster of customers.

If you have a high retention rate, then you’re doing well in terms of retaining existing customers and converting them into repeat purchases. If not, then there may be issues with the quality of your product or service that require attention.

Calculate CLTV

You can calculate CLTV by multiplying the average revenue per customer by the average number of years a customer remains a loyal customer. This is also known as “customer lifetime value,” or CLV for short. The formula looks like this:

CLTV = ARPU x # of years NPS > 0 (1)

For example, if your company’s average revenue per user is $100 and you have an average NPS score of +10 after one year (that is, 10% of users are promoters), then your CLTV would be calculated as follows:

CLTV = 100 x 1 (2) = 100$ (3) / 12

Conclusion

Now that you have the basics of calculating CLV, you can use these formulas to calculate the value of your customers. The more customers you have, the greater your chances of being profitable.

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