In this Chapter, I would walk you through how to use Python to build a CLV calculator and elaborate on why CLV is vital. By the end of this article, you can learn the unique performance metrics and the core algorithm in the CLV calculator to write the codes.
Table of Contents: CLV Calculator
- Why is CLV vital from a financial and marketing perspective?
- Unique Performance Metrics to Optimise
- CLV, net CLV, and ARPU Algorithm
- OOP, HTML, CSS
- Full Python Script of CLV Calculator
- FAQ
Why is CLV calculation vital from a financial and marketing perspective?
There is a saying “Starting a business is difficult and maintaining a business is even more difficult”. The truth is the competition would be getting more and more fierce with more players joining the game and competing with you. New customer acquisition costs are definitely increasing, so the question is how to sustainably defend your business and maintain the customer loyal to your product and service. It’s for the purpose of maintaining business competition cutting-edge at the end and avoiding losing profit or even losing money.
The quality of product and service and the branding are of course important in common sense. But there are some tips and tricks to play around by using the customer lifetime value from a financial and loyalty marketing perspective. Below are the reasons why CLV calculation is vital:
Increase the conversion rate of new customer acquisition
CLV calculation and loyalty strategies like memberships represent is not a force to earn profit from the new customer purchase. Thus, you can have more space to design your acquisition marketing campaign fighting for more customers from the market. So the product and service pricing and selling strategies can have more variants. For example, you can learn what the average revenue per user is, so you can have a CAC benchmark from the CLV, to deploy the campaign. It’s rather than just using the 1st purchase profit as the CAC.
Lock the customer’s future spending for avoiding their spending shifting to competitors
CLV calculation can instruct you how to design different membership plans, and set the membership plan pricing. It’s because you basically understand how much a customer segmentation would spend in the coming year or coming lifespan. So launching a promotion and appealing to customers to join for a discounted plan can lock the future profit upfront.
Increase the user active and loyalty rate
CLV calculation can tell how much you can invest and incentivize your customers to use your product and service. For example, the plan can let customers earn points to redeem gifts, or provide free delivery. So you can increase the user active rate using your products, but also the customers might hesitate to give up your service because of earned points and free service on your side. In a way, CLV calculation can give you important numbers to deploy plans to avoid losing customers.
CLV Calculator – Unique Performance Metrics to Optimise in the Subscription Plan Model
In terms of the core sections in the Python CLV calculator, it’s quite similar to the eCommerce NPV evaluation. For more details, please check out this article released earlier.
However, in CLV for subscription and membership model, below are two sets of unique metrics to plan and optimize
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Retention Rate and Lifespan
Retention rate and lifespan are two critical metrics in CLV calculation. A higher sustainable retention rate and longer lifespan can have a tremendous exponential effect on business profitability.
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New acquisition Customer vs Renewal Customer
One of the unique models of calculating CLV is the revenue and cost between new acquisitions and renewals are different. So in Python coding, we need to create two sets of variables with relevant math formulas to output the number.
Normally CAC would include membership activation costs and paid media costs as well, which is different from renewal ones.
First thing first, it’s because renewal customers might have no cost on the acquisition or partner commission. Also, it costs less or even no in the activation when fulfillment and production cost are one-off unless your business renewal plan has additional delivery, or the customer upgrades the plan.
Then, renewal pricing might be higher than the first purchase, as you might offer a first purchase discount to join the membership and any renewal memberships would be returned to the original price.
If you are interested in different types or timeframes of membership analysis, please check out the cohort analysis released earlier.
https://www.easy2digital.com/strategy/big-data/subscription-business-model-cohort-analysis-for-retention-rate-arpu-cac-clv/
CLV Calculator – CLV, net CLV, and ARPU Algorithm
In the end, the Python CLV calculator can tell you the total profit from a membership plan or a customer segmentation. The result would be affected by the new customer acquisition cost, retention rate, lifespan, and renewal revenue. So here is the algorithm to calculate CLV (With the Python codings in the screencap picture)
CLV = new customer revenue + renewal Revenue * retention rate…… + renewalRevenue * (retentionRate ** lifespan) - CAC
From the above algorithm, I assume we don’t have any additional cost in the renewal. If your case has an additional cost in the renewal, please add and minus those.
CLV in a way is not the final number to tell you the profitability space, as you might invest money upfront, such as membership software, production, manpower, etc. So I’ll suggest you minus the initial investment upfront. For the ARPU, its net CLV is divided by the total new acquisition member.
ARPU normally is much higher than the cost per sale space as it includes the lifespan factor. As mentioned earlier, it’s a more realistic number and bigger space for you to deploy customer acquisition campaigns or design a new membership.
OOP, Flask, HTML, CSS
For more details about OOP, flask, HTML, and CSS to build a calculator using Python, please refer to these two articles.
Full Python Script of CLV Calculator
If you are interested in the full script of the CLV calculator, please subscribe to our newsletter by adding the message “Chapter 38”. We would send you the script immediately to your mailbox.
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FAQ:
Q1: What is an eCommerce Business CLV Calculator?
A: An eCommerce Business CLV Calculator is a tool that helps businesses determine the lifetime value of their customers. It takes into account various factors such as average order value, purchase frequency, and customer retention rate to estimate the value a customer brings to the business over their lifetime.
Q2: Why is calculating CLV important for eCommerce businesses?
A: Calculating CLV is important for eCommerce businesses as it allows them to understand the long-term value of their customers. By knowing how much a customer is worth over their lifetime, businesses can make more informed decisions regarding customer acquisition, retention strategies, and marketing budgets.
Q3: How can an eCommerce Business CLV Calculator benefit my business?
A: An eCommerce Business CLV Calculator can benefit your business by providing valuable insights into customer value. It can help you identify high-value customers, optimize your marketing efforts, and improve customer retention strategies. By understanding the lifetime value of your customers, you can make data-driven decisions to drive growth and profitability.
Q4: What data inputs are required for an eCommerce Business CLV Calculator?
A: An eCommerce Business CLV Calculator typically requires data inputs such as average order value, purchase frequency, customer retention rate, and average customer lifespan. These inputs can be obtained from your business’s sales and customer data.
Q5: How accurate are the calculations made by an eCommerce Business CLV Calculator?
A: The accuracy of the calculations made by an eCommerce Business CLV Calculator depends on the quality and accuracy of the data inputs. It is important to ensure that the data used is up-to-date and reflective of your business’s actual performance.
Q6: Can an eCommerce Business CLV Calculator be customized for my specific business?
A: Yes, an eCommerce Business CLV Calculator can be customized to suit the specific needs of your business. You can adjust the inputs and parameters based on your industry, customer behavior, and business goals.
Q7: Are there any limitations to using an eCommerce Business CLV Calculator?
A: While an eCommerce Business CLV Calculator can provide valuable insights, it is important to note that it is based on assumptions and estimations. The accuracy of the calculations may vary depending on the complexity of your business model and market dynamics.
Q8: Can an eCommerce Business CLV Calculator help me improve customer retention?
A: Yes, an eCommerce Business CLV Calculator can help you improve customer retention. By understanding the lifetime value of your customers, you can identify opportunities to increase customer loyalty, provide personalized experiences, and implement targeted marketing campaigns.
Q9: How often should I use an eCommerce Business CLV Calculator?
A: It is recommended to use an eCommerce Business CLV Calculator regularly to monitor changes in customer value and track the effectiveness of your marketing and retention strategies. Quarterly or bi-annual reviews can provide valuable insights into the performance of your business.
Q10: Where can I find an eCommerce Business CLV Calculator?
A: There are various eCommerce Business CLV Calculators available online. You can search for them on search engines or explore eCommerce analytics platforms that offer CLV calculation tools.