Customer Lifetime Value — Chapter 3

Average Revenue Per User

IMPORTANT: You never want to compute CLV as “total revenue ÷ total customers”. This ignores how long customers have been with you!

To calculate historical CLV using average revenue per user, calculate the average revenue per customer per month (total revenue ÷ number of months since the customer joined), add them up, and then multiply by 12 or 24 to get a one- or two-year CLV.

Suppose Alice and Bob are your only customers and their purchases look like this:

Customer Name Purchase Date Amount
Alice January 1, 2013 $150
Alice May 15, 2013 $50
Alice June 15, 2013 $100
Bob May 1, 2013 $45
Bob June 15, 2013 $75
Bob June 30, 2013 $100


Suppose today is July 1, 2013. Your average monthly revenue from Alice is ($150 + $50 + $100)/6 = $50 and your average monthly revenue from Bob is ($45 + $75 + $100)/2 = $110.

Adding these two numbers gives you an average monthly revenue per customer of $160/2 = $80. To find a 12-month or 24-month CLV, multiply that number by 12 or 24.

The benefit of an ARPU approach is that it is simple to calculate. The drawback is that this number can be misleading if you have a lot of new or a lot of old customers; it does not take into account changes in your customers' behaviors. If you have a lot of “Alices” as customers but a new Facebook ad is making you popular among “Bobs”, then your average monthly revenue per customer going forward is likely to be closer to Bob's $110 than Alice's $50.

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