how to calculate clv index
TRANSCRIPT
Problem
Pareto principle
Up to 80% of revenues in the business can come from just 20% of clients.
Clients Revenue
80%
20%
20%
80%
Significant amount of company’s revenues come from the special, the most committed group of clients.
How to characterize clients?
Solution
CLV indicator will be helpful here!CustomerLifetimeValue
It is the sum of income that have been (or will be) generated during the relation between your company and its clients.
CustomerLifetimeValue
How to calculate CLV (1)Historical method
Average revenue per user (ARPU)
ARPU - involves the use of existing customer spend
Let’s suppose, that in the last six months, clients named John and Kate have shopped in the following way:
Client/Month January Fabruary March April May June
John 50 PLN 0 PLN 0 PLN 50 PLN 50 PLN 200 PLN
Kate 300 PLN 0 PLN 0 PLN 150 PLN 0 PLN 100 PLN
If in a half of the calendar year you will want to calculate the average monthly CLV for John and Kate, then you can do the following:
Client/Month January Fabruary March April May June
John 50 PLN 0 PLN 0 PLN 50 PLN 50 PLN 200 PLN
Kate 300 PLN 0 PLN 0 PLN 150 PLN 0 PLN 100 PLN
( )+ + + + + /6= 58,33 PLN
/6 = 91,67 PLN( )+ + + + +
ARPU
If in a half of the calendar year you will want to calculate the average monthly CLV for John and Kate, then you can do the following:
Thus obtained ARPU value you need to multiply x 12 to receive annual CLV.
So the annual CLV for Kate will be 1100 PLN, in the case of John it will be 699 PLN.
Client/Month January Fabruary March April May June
John 50 PLN 0 PLN 0 PLN 50 PLN 50 PLN 200 PLN
Kate 300 PLN 0 PLN 0 PLN 150 PLN 0 PLN 100 PLN
( )+ + + + + /6= 58,33 PLN
/6 = 91,67 PLN( )+ + + + +
ARPU
To consider
ARPU method is simple, but:
You should be aware that this method does not take into account many variables, such as the differences between the new and old clients, changes in the offer, seasonality.
!
Characteristics of your clients and their behavior change over time.
You should be aware that this method does not take into account many variables, such as the differences between the new and old clients, changes in the offer, seasonality.
ARPU method is simple, but:
!
You should be aware that this method does not take into account many variables, such as the differences between the new and old clients, changes in the offer, seasonality.
The disadvantage of the ARPU is the fact that it is a simple average. Therefore, the value calculated CLV might always be changed by the high value of purchases.
Characteristics of your clients and their behavior changes over time.
ARPU method is simple, but:
!
You should be aware that this method does not take into account many variables, such as the differences between the new and old clients, changes in the offer, seasonality.
For new clients who make numerous purchases at the beginning, CLV may be overestimated.
The disadvantage of the ARPU is the fact that it is a simple average. Therefore, the value calculated CLV might always be changed by the high value of purchases.
Characteristics of your clients and their behavior changes over time.
ARPU method is simple, but:
!
How to calculate CLV (2)Historical method
Cohort analysis
Cohort analysis
Create a “medium cohort “, that is where the average of purchases is stored, which the customer did in the first month of being your consumer. Then calculate the same for the second and subsequent months.
Cohort analysis
Create a “medium cohort “, that is where the average of purchases is stored, which the customer did in the first month of being your consumer. Then calculate the same for the second and subsequent months.
The level of consumer spending falls in the coming months.
Chart can be used to estimate the value of the CLV.
To calculate the 12-month CLV for a new customer, add up all of the average values for 12 months.
Cohort analysis
Chart can be used to estimate the value of the CLV.
To calculate the 12-month CLV for a new customer, add up all of the average values for 12 months.
To estimate how much clients who have made their purchase three months earlier, will spend the next 9 months, add up the values of the last 9 points (months) on the chart.
Cohort analysis
Benefits
The calculation of CLV allows to estimate the future state of a business, so you can take appropriate early intervention. +
The calculation of CLV allows to estimate the future state of the business, so you can take appropriate early intervention.
You will be able to identify the group of clients who spend most of their resources (cash, time, interest) for your products or services.
+
You will be able to implement appropriate marketing strategies aimed at maintaining or increasing the involvement of a customer, for example, scoring.
You will be able to identify the group of clients who spend most of their resources (cash, time, interest) for your products or services.
The calculation of CLV allows to estimate the future state of the business, so you can take appropriate early intervention.
+
CLV can be calculated for the different sales channels, so you can decide whether to increase or decrease spending on any of them.
You will be able to identify the group of clients who spend most of their resources (cash, time, interest) for your products or services.
You will be able to implement appropriate marketing strategies aimed at maintaining or increasing the involvement of a customer, for example, scoring.
The calculation of CLV allows to estimate the future state of the business, so you can take appropriate early intervention.
+
Synerise solution
With Synerise you can score your clients and find the most valuable of them.
You can send your campaign to the special group of clients, e.g. those most valuable.
You can chose the best communication channel.
