Calculating Revenue Per Customer

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Once you have a handle on the cost of acquiring a new customer, the next step is figuring out the amount of money you expect to make from them. This is often called Revenue Per Users (RPU) in the tech world, but let’s stick with Revenue Per Customer (RPC) for this conversation. For the calculation of RPC you are going to want to figure out the first transaction with each customer and then also estimate the value of future transactions. We will walk through a few examples here.

For subscription businesses, whether they are consumer or business, you will need to make some assumption of how long a new user is going to stick around. Maybe you offer a monthly renewable payment plan, or maybe you have some of your clients paying for the full year upfront. Either way, some of these customers will stick around and some will churn. When you are thinking about RPC it will be important to estimate how long your customers will continue paying you. In the beginning, the best bet is to use some type of churn expectations based on the bigger players in your industry who might have published stats. Be conservative with this approach though, Netflix has an industry best churn rate because they spend billions on new content that people don’t want to miss, you won’t have that advantage for a long time. As I have said in multiple prior posts, track as much data as possible on churn. Track it by cohort/timing of sign up, track it by customer demographics, track it by how you sourced the customer, track freaking everything. Make a reasonable estimate on length of time you will keep each new customer and use this to calculate RPC.

For direct-to-consumer retail businesses you will have a first purchase order for each new customer, so that is an easy place to start. However, if your product is good most customers will buy more from you in the future. It makes sense to think about that new customer like the subscription businesses above. Try to estimate the value of future purchase that this newly acquired customer will make over time. Start with an industry standard assumption, measure everything about your customers over time, and fine tune your RPC estimates as you go.

For ad-based businesses in the media or related spaces, you will have to learn about your customer usage of your product to calculate RPC. This likely means getting a deep understanding of how often your customers come back to your app or channel and how long they engage when they are there. Much like the subscription businesses, start with the conservative end of the industry standard, then measure and adjust. Once you have a strong handle on usage, you will need to figure out the expect ad rates you can earn. Again, just using an industry number is likely not a fair approach in the beginning. Premium properties live American Idol or 60 Minutes will garner premium ad rates per viewer hour, you will not get this advantage in the early days. Find an ad level that is more realistic for your early stage, you can adjust higher when you prove you can sell a higher number to brands.

Now that you have a strong analysis of your acquisition costs and Revenue Per Customer, we will proceed in the next post to evaluating your unit profitability.