Useful Commercial terms

Customer lifetime value (CLV or CLTV) is a metric that represents the total net profit a company can expect to generate from a customer throughout their entire relationship. It takes into account the customer’s initial purchase, repeat purchases, and the average duration of their relationship with the company.

Customer lifetime value helps you understand and gauge current customer loyalty. If customers continue to purchase from you time and time again, that’s usually a good sign you’re doing the right things in your business. Furthermore, the larger a customer lifetime value, the less you need to spend on your customer acquisition costs.

What is a Net Promoter Score and how does it work

Net Promoter Score, [NPS] is a metric used in customer experience programmes. NPS measures the loyalty of customers to a company. NPS scores are measured with a single question survey and reported with a number from -100 to +100. A higher score is desirable.

Respondents give a rating between 0 (not at all likely) and 10 (extremely likely) and, depending on their response, fall into one of 3 categories to establish an NPS score:

  • Promoters respond with a score of 9 or 10 and are typically loyal and enthusiastic customers.
  • Passives respond with a score of 7 or 8. They are satisfied with your service but not happy enough to be considered promoters.
  • Detractors respond with a score of 0 to 6. These are unhappy customers who are unlikely to buy from you again, and may even discourage others from buying from you.

Calculating your Net Promoter Score
It’s simple to calculate your final NPS score – just subtract the percentage of detractors from the percentage of promoters.

For example, if 10% of respondents are detractors, 20% are passives and 70% are promoters, your NPS score would be 70-10 = 60.

What Is a Churn Rate?
The churn rate refers to the rate at which subscribers or customers stop transacting with your business. Simply put, they are subscribers who canceled their subscriptions or customers who did not return to your store.

A higher churn rate means more customers are leaving your business. In contrast, a lower churn rate means retaining more customers than you already have. Understanding the difference can be useful in making better strategic decisions for your business.

Churn Rate vs. Growth Rate
Churn rate refers to the rate at which your business loses customers. In contrast, growth rate refers to the rate at which your business attracts first-time customers in a given period.

You can compare the two metrics to determine whether your customer base is growing or shrinking. A higher churn rate than a growth rate is usually consider to be a bad thing because it means a loss in consumers. However, a higher growth rate than a churn rate is usually ideal because your customer base is growing.

For example, imagine that a software-as-a-service (SaaS) company gained 50 subscribers but lost 100 in one quarter. This situation is a loss because the business’s customer base declined. In contrast, if the same company gained 100 but lost 50—then it’s regarded as a win, even if it lost several customers.

What is a Good Churn Rate?
The ideal churn rate for mature and established companies is 5% to 7% in annual churn and less than 1% in monthly churn. If your company had 1,000 customers, this means you would only lose 50 customers per year or four to five customers per month.

Early-stage startups or Small or Medium Businesses typically have a churn rate of 10% to 15%. Since their product often needs improvements, they often need help to maintain a lower churn rate.

Benefits Of Knowing Your Churn Rate

While it may seem like a simple thing on the surface, many business owners have been hurt by their inability to see that their churn rate isn’t where it needs to be to successfully grow their bottom line. Being able to identify your churn rate can helpful in keeping your books balanced and your company healthy. Here are a few reasons why knowing your churn rate is essential.

Determining the Effectiveness of Marketing Strategies
Your churn rate reveals whether current marketing initiatives effectively retain people within your customer base. As an example, if people are quitting their subscriptions, examine whether your content strategy is relevant to your target audience. Or, you could brainstorm ways—such as offering the next month at a discounted rate—to keep customers from leaving altogether.

Growing Your Customer Base
According to Harvard Business Review, converting a first-time customer is five to 25 times more expensive than keeping an existing one. A significant reduction in your churn rate makes your business more profitable because you’re able to keep most subscribers within your customer base.

Financial Forecasting
For businesses with subscription-based models, churn rate helps you evaluate whether profits grew or declined. It also determines your business’s financial health in the foreseeable future. When combined with CLV it helps forecast potential outcomes for month and year end.

Evaluate Product-Market Fit
Is your product relevant to your ideal customer? Does it meet the needs of your target audience? If a company finds that the churn rate is increasing per month or quarter, the product-market fit is flawed. The business may need to revamp or improve the product to make it attractive and relevant to the target market.

What Is Average Revenue per Customer?

Average Revenue per Customer (ARPC) is the amount of topline revenue that one customer contributes to your eCommerce brand over a time period (it is usually measured and tracked monthly, quarterly, and yearly).

Note: ARPC is sometimes also called ARPU (Average Revenue per User), particularly in the Software as a Service [SaaS] world.

Why You Should Care about ARPC

Average revenue per customer is a high-level KPI to understand general business health, and healthy brands see the metric increase over time.

If it’s decreasing, it can be a red flag there may be a disconnect between your offering (e.g., product, pricing) and what your customers want.

Tracking ARPC can also serve several additional functions:

  • Quick check to know if you’re generating enough topline revenue to meet your business goals
  • Competitive metric to see how your revenue stream compares to similar companies
  • Way to understand if your pricing strategy is right, particularly if you offer different subscription packages

How to Calculate Average Revenue per Customer

To calculate ARPC, divide your total topline revenue (over a time period) by your number of active customers (over the same period):

For example, if in March 2024, your total topline revenue was £20,000, and you had 2,000 customers who made a purchases or had a subscription during that time, your ARPC would be £10 in that month.

How does this average compare to specific customers – what might you do to grow this? It might be interesting to calculating ARPC each month

How does this compare to your competition, other parts of your business or other geographies?

Software-as-a-service, or SaaS for short, is a cloud-based method of providing software to users. SaaS users subscribe to an application rather than purchasing it once and installing it. Users can log into and use a SaaS application from any compatible device over the Internet.

The actual application runs in cloud servers that may be far removed from a user’s location.

A SaaS application may be accessed through a browser or through an app. Online email applications that users access through a browser, such as Gmail and Office 365, are common examples of SaaS applications.

The difference between SaaS and a software installation on a user’s computer is somewhat like the difference between streaming a TV show online and buying all the seasons of the TV show on DVD.

A Customer Relationship Management (CRM) system helps manage customer data. It supports sales management, delivers actionable insights, integrates with social media and facilitates team communication.

At its lowest level it can be a simple spreadsheet containing all the relevant customer information – for smaller businesses this is often sufficient

For larger organisations it becomes necessary to have a dedicated system with all the details available to your whole business and all held in one place – this saves mistakes being made, all updates are seen by everyone imediatly and ultimatly gives the opportunity to use the system to generate reports and to customise marketing and account plans.

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