In this Python Tutorial, I would walk you through how to use Python to build a CLV calculator and elaborate 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.
Programming Modules and language: Flask, Python, HTML, CSS
Approach: OOP, web application
- Why is CLV vital from a financial and marketing perspective?
- Unique Performance Metrics to Optimise
- CLV, net CLV and ARPU Algorithm
- OOP, Flask, HTML, CSS
- Full Python Script of CLV Calculator
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 a 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:
1. Increase conversion rate of new customer acquisition
CLV calculation and loyalty strategy like memberships, represents 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.
2. Lock the customer future spend for avoiding their spend 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 customers to join for a discounted plan can lock the future profit upfront.
3. 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 the 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 with eCommerce NPV evaluation. For more details, please check out this article released earlier.
However, in CLV for subscription and membership model, below are some two set of unique metrics to plan and optimize
Retention Rate and Lifespan
Retention rate and lifespan are two critical metrics in CLV calculation. Higher sustainable retention rate and longer lifespan, it can have a tremendous exponential effect in business profitability.
New acquisition Customer vs Renewal Customer
One of the unique models of calculating CLV is the revenue and cost between new acquisitions and renewal are different. So in the Python coding, we need to create two sets of variables with relevant math formulas to output the number.
Normally CAC would include membership activation cost and paid media cost as well, which is different with renewal ones.
First thing first, it’s because renewal customers might have no cost on the acquisition, 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 first purchase, as you might offer a first purchase discount to join the membership and any renewal memberships would be returning to the original price.
If you are interested in different types or timeframes of membership analysis, please check out the cohort analysis released earlier.
CLV Calculator – CLV, net CLV and ARPU Algorithm
At the end, 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 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 softwares, production, manpower, etc. So I’ll suggest you to minus the initial investment upfront. For the ARPU, it’s net CLV 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 CLV calculator, please subscribe to our newsletter by adding the message “Python Tutorial 38”. We would send you the script immediately to your mailbox.
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