How to Measure Customer Lifetime Value With Segment Analytics

Mrinal Parekh Mrinal, Senior Product Marketing Manager at CleverTap, excels in B2B strategy, market planning, and product launches. Proven success at Razorpay and Amazon.

Published on October 24, 2023
Reading time 6 min read
Views 3.67k

How to Measure Customer Lifetime Value With Segment Analytics

What if we told you that there’s one sure-fire way to improve your brand’s profitability (by up to 25% or more!) and potentially increase profits — by up to 95%?

The tip? Simply increase your retention by 5%.

As you probably know, it costs six-to-seven-times more to acquire a new customer than it does to retain current customers.

And the key way to identify which customers to focus your retention efforts on is to estimate customer lifetime value (CLV).

Customer Lifetime Value is the Key

Customer lifetime value represents how much a customer is expected to spend with your company from their first purchase to their last. It helps you identify your most valuable customers so you can optimize your marketing campaigns to target these customers and enhance their satisfaction and retention — and your ROI.

This business metric can drive everything from your marketing strategy, to sales techniques, to the products and/or services you develop. In short, it’s one of the most important metrics to understand and to increase.

Depending upon the data available to you, there are many formulas for measuring CLV. Measuring CLV by using segment analytics involves segregating customers into groups based on their common characteristics, traits, and/or behaviors. With this method, brands can calculate CLV for diverse categories of customers and compare their value to the business.

How to Measure CLV With Segment Analytics

Here’s how to measure CLV with segment analytics in five steps:

1. Define customer segments

First, define customer segments based on criteria such as demographics, location, frequency and value of purchase, product preferences, and more. Using a customer engagement tool like CleverTap allows brands to gather and analyze data about customers and how they interact with your brand across multiple channels.

Segment customers by these attributes:

Age group: 18-24, 25-34, 35-44, etc.
Gender: Male, Female, Decline to state
Location: City, State/Province, Country
Device: Desktop, Mobile, Tablet
Channel: Organic, Paid, Social
Value: Low, Medium, High

Create more complex and diverse segments by combining multiple criteria:

High-value female customers from New York that make a purchase three or more times per month.
Low-value male customers from Dubai who purchase once a year
Medium-value customers from any location who buy twice a month using a mobile device

The number and type of segments depend on your end goal and the data available. You should aim to create segments that are:

Measurable: Quantify the size and value of each segment
Accessible: Reach each segment with relevant marketing campaigns
Relevant: Each segment has different needs and preferences that marketers can address
Actionable: Craft strategies to improve the performance of each segment

2. Calculate average revenue per customer for every segment

To calculate the average revenue per customer, divide the total revenue generated by each segment by the number of customers in that particular segment.

For example, a particular segment has 100 customers who purchase from a brand once a month and generate $20,000 in revenue. In this case, the average revenue per customer is $20,000 divided by 100, or $200. This is how much each customer in that segment contributes each month, on average.

3. Calculate average lifespan of a customer in each segment

To work out the average lifespan of customers in each segment, simply estimate how long a customer stays with your business before they stop making purchases.

For example, suppose there’s a segment of customers who purchase once every month and these customers typically continue doing so for a span of two years. In this case, the average lifespan of this segment of customers is 24 months.

Marketing teams can also leverage past data or refer to industry benchmarks to estimate this number.

4. Multiply the average revenue per customer by the average lifespan of a customer in each segment

Multiplying the average revenue generated per customer by the average lifetime of a customer for individual segments will determine the CLV for every segment, and will predict how much each customer is worth to you over their entire lifespan.

For example, suppose there’s a segment of customers who buy once every month, generating $100 in revenue per customer, and this segment stays with the brand for 24 months. In this case, the CLV for that segment is $100 x 24 = $2,400.

Below are other ways to calculate CLV:

CLV = Average Revenue Per Customer x Average Lifespan of a Customer
CLV = Average Order Value x Purchase Frequency x Average Lifespan of a Customer
CLV = Average Profit Margin x Purchase Frequency x Average Lifespan of a Customer

5. Compare the CLV of different segments to identify the most valuable customers

This is the key to the whole process. It’s what steps 1-4 are building up to. By comparing the CLV of different segments, you can identify your most valuable customers. Then, target them with personalized marketing campaigns. This will ensure you’re optimizing your marketing budget to boost customer satisfaction and increase revenue.

For example, as a marketer you can:

Focus on retaining and upselling your high-value customers, those with a high CLV and a low churn rate.
Increase the loyalty and engagement of your medium-value customers who have a moderate CLV and a moderate churn rate.
Acquire more customers who have similar characteristics and behaviors to the high-value customer segment.
Reduce the cost of marketing to low-value customers, those with a low CLV and a high churn rate.
Test different offers, incentives, and messages for each segment to see what works best.

All KPIs are certainly important. But Customer Lifetime Value may be the most critical metric to track when trying to thrive in a dynamic, highly competitive market. CLV helps you focus your efforts and resources on your highest-value customers.

By leveraging segment analytics to measure CLV, you’ll gain deeper analytical insights into your customer base, better tailor your marketing efforts, and make data-backed decisions that will help drive long-term profit.