How to Calculate Average Revenue Per Low-Value Customer: A Step-by-Step Guide
By Emil Kristensen CMO
@ Sleeknote

If you’re looking to increase revenue for your business, one often-overlooked area is the group of customers who spend the least amount of money. These low-value customers may only make small purchases, but they should not be ignored as their combined purchase power can add up to a significant amount. Calculating the average revenue from this group, known as Average Revenue Per Low-Value Customer (ARPLV), is a powerful tool in growing your business. In this article, we’ll explain why it’s important to track ARPLV, how to define and identify low-value customers, gather relevant data, calculate the ARPLV formula, and interpret and strategize based on this data.

Why Calculating Average Revenue Per Low-Value Customer is Important for Your Business

Low-value customers are still valuable to your business. They might not make a significant purchase on an individual basis, but if you have many customers like this, their total value adds up. Calculating ARPLV can help you identify trends and re-evaluate your sales strategy. You might find ways to turn low-value customers into high-value customers, or at least encourage them to make bigger purchases. On the other hand, if you identify that a significant portion of your revenue comes from low-value customers, it might not be worth investing resources to boost their spending, and instead, you may want to focus on acquiring more high-value customers.

Another benefit of calculating ARPLV is that it can help you identify which products or services are most popular among low-value customers. This information can be used to create targeted marketing campaigns or promotions to encourage these customers to make repeat purchases or upgrade to higher-value products. Additionally, by understanding the purchasing behavior of low-value customers, you can optimize your pricing strategy to attract more high-value customers without losing the low-value ones.

Defining Low-Value Customers and WhyThey Matter to Your Bottom Line

Low-value customers are those who make small purchases, which may vary depending on your industry. For example, if you are in the retail industry, a low-value customer might only buy a few items at a time, while high-value customers might make bulk or high-end purchases. However, low-value customers should not be overlooked as they are still a part of your customer base and contribute to your bottom line.

Furthermore, low-value customers can also be a valuable source of feedback for your business. Since they are not making large purchases, they may be more willing to provide honest feedback about their experience with your products or services. This feedback can help you identify areas for improvement and make necessary changes to better serve all of your customers, including high-value ones.

Gathering Data: Identifying Low-Value Customers and Their Purchasing Habits

The first step in calculating ARPLV is identifying low-value customers and recording their purchases. You will also need to gather data on purchase frequency and other important customer information such as demographics, purchase history, and so on. This can be done manually via tracking forms or automatically through a point of sales software. Regardless of the method used, it is essential to track every transaction to get accurate data.

It is important to note that identifying low-value customers is not just about their purchasing habits. It also involves analyzing their behavior and interactions with your business. For example, low-value customers may be more likely to return items, require more customer service, or have a higher churn rate. By understanding these patterns, you can develop strategies to improve their experience and potentially increase their value to your business.

Calculating Average Revenue Per Low-Value Customer: The Formula Explained

The formula for calculating ARPLV is straightforward: divide the total revenue from low-value customers by the number of low-value customers. For example, if you had a total of $5,000 in revenue from 100 low-value customers, the ARPLV would be $50.

It is important to note that ARPLV is just one metric to consider when analyzing customer value. It is useful for identifying trends and patterns in revenue from low-value customers, but it should not be the only factor considered. Other metrics, such as customer lifetime value and customer acquisition cost, should also be taken into account when making strategic decisions about customer acquisition and retention.

Using Excel or Other Tools to Calculate ARPLV

Using an Excel spreadsheet simplifies the calculation process for ARPLV. By inputting the data in a spreadsheet and applying the formula, the results are automatically calculated. Other tools, such as customer relationship management (CRM) software, can also track and calculate ARPLV.

Interpreting Your ARPLV Data: What It Tells You About Your Business

After calculating the ARPLV, it’s essential to analyze the results. This data can help you identify trends, such as which products or services low-value customers are buying, how frequently they are making purchases, and which demographic groups are buying from them. This insight can help adjust your sales strategy to better appeal to these customers.

Strategies for Increasing ARPLV and Boosting Profits from Low-Value Customers

Several strategies can be employed to boost ARPLV and increase profits from low-value customers. One of the most effective is to introduce upsell and cross-sell opportunities, such as offering bundled deals or promotions. Additionally, improving the customer experience and providing personalized service can also encourage customers to increase their spending.

Case Study: How One Company Improved ARPLV and Increased Overall Revenue

A boutique clothing store noticed that while they had many low-value customers, they also had many loyal customers who had purchased high-end items. They began offering personal styling and created a loyalty program that rewarded customers with discounts on future purchases. By doing so, they were able to convert some low-value customers into higher-value customers while also increasing overall revenue.

Best Practices for Tracking and Analyzing ARPLV Over Time

Finally, tracking ARPLV should be an ongoing process. Data should be collected and analyzed regularly to identify changes in customers’ purchasing habits. It should also be compared year-over-year to determine if there is growth over time. By doing so, businesses can ensure that they are maximizing the value of all customers, regardless of their purchase size.

In Conclusion

Calculating ARPLV is essential for businesses that want to maximize their revenue potential. By identifying and tracking low-value customers, gathering relevant data, and analyzing results, businesses can create targeted strategies that increase per-customer value while boosting overall profits.