How do you calculate customer loyalty using CLV?

1 Step 1: Define your time period

The first step is to decide on a time period for your CLV calculation. This can be a month, a quarter, a year, or any other interval that makes sense for your business. The time period should reflect how often your customers interact with you, how long they stay with you, and how much they spend with you. For example, if you run a subscription-based service, you might choose a month as your time period, since that is how often your customers pay you.

2 Step 2: Calculate your average revenue per customer

The next step is to calculate your average revenue per customer (ARPC) for the time period you chose. This is the total revenue that you generated from your customers divided by the number of customers that you had in that time period. For example, if you made $10,000 from 100 customers in a month, your ARPC for that month is $100.

3 Step 3: Calculate your retention rate

The third step is to calculate your retention rate for the time period you chose. This is the percentage of customers that stayed with you from one time period to the next. For example, if you had 100 customers in January and 90 of them were still with you in February, your retention rate for February is 90%. You can also calculate your churn rate, which is the opposite of retention rate, by subtracting retention rate from 100%. For example, your churn rate for February is 10%.

4 Step 4: Calculate your CLV

The final step is to calculate your CLV for the time period you chose. This is the present value of the future cash flows that you expect to receive from a customer over their lifetime with you. There are different formulas for calculating CLV, but one simple way is to use this formula: CLV = ARPC * (Retention Rate / Churn Rate) This formula assumes that your ARPC and retention rate are constant over time, and that your discount rate (the interest rate that you use to adjust future cash flows to present value) is zero. You can adjust the formula to account for different scenarios, such as changing ARPC or retention rate, or using a positive discount rate. For example, using the numbers from the previous steps, your CLV for February is: CLV = $100 * (0.9 / 0.1) = $900 This means that each customer that stayed with you in February is worth $900 to you in terms of net profit over their lifetime.

5 How to use CLV to measure customer loyalty

Calculating your customer lifetime value (CLV) can help you measure and improve your customer loyalty. Compare your CLV to your customer acquisition cost (CAC) to make sure you are making more profit from customers than you are spending to get them. Segment customers based on their CLV, and tailor marketing efforts accordingly. Track your CLV over time, and see how it changes in response to different campaigns, offers, or channels. Monitor CLV trends to identify any opportunities or threats that might affect customer loyalty. This will help you identify your most loyal and profitable customers, as well as those who require incentives or discounts to increase their loyalty and value.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?