There are complicated ways to calculate customer lifetime value. Some formulas take more variables into account (e.g. visitor acquisition cost, cost of goods, profit margins, etc.) to derive CLV.
On a basic level, however, measuring customer lifetime value involves understanding 3 things:
- The value of your average order
- The number of transactions you have given an interval
- The average length of retention you have per customer
So if your average order value is $50, you average 2 purchases per year, and you keep your customers for an average of 3 years, then your simplified CLV formula will look something like this:
$50 * 2 * 3 = $300 CLV
But looking at just the averages may be deceiving.
You could have a number of extremely loyal customers who average 6 orders per year and remain your customers for 6 years on average.
In contrast, you can have a set of shoppers that tends to just make 1 order and never make a repeat purchase.
These groups may have different demographics, traffic sources, and nurture campaigns. And the things that you can tweak to influence raising single-order purchases may be very different from encouraging return visits, multiple purchases, and loyalty.
That’s why you need to understand segments.