How to Calculate the ROI of Online Communities

By Richard Millington

ROI People

Calculating Customer Lifetime Value

The customer lifetime value (CLV) is the total amount of revenue a customer is likely to spend with the company during their lifetime. This is commonly calculated by the following formula:

CLV = ((T x AOV) x R) x AGM

Simply, this is the number of transactions (T) multiplied by the average order value (AOV) multiplied by the average retention rate (R), multiplied by the average gross margin (AGM).

If a customer buys three times from the organization per year, spends $70 on average in these transactions and remains a customer for 36 months. This would be a total value of $630. We then multiply this figure by the average gross margin of these transactions (let’s assume 30%) for a total customer lifetime value of $189*

An online community can increase the customer lifetime value in one of four ways (three of which are relevant here):

  1. Increase the frequency of purchases.
  2. Increase the average order value.
  3. Increase the retention rate.
  4. Reduce costs per customer (not covered here).

Communities primarily help increase loyalty, which shows up in the frequency of purchases or, more likely, the retention rate. In an ideal environment, we could measure each of these individually and determine the impact of each. However, in practice it is usually easier to measure increase in spending multiplied by the number of active members, as we’ll describe over the next few pages.

* As mentioned, in theory, we should also apply a Net Present Value (how much this revenue will be worth in the future).

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