How to compute customer life time value?

Some seasoned entrepreneurs may say “break even” or some other number is the most important metric, but I believe “lifetime value” is perhaps the most significant measure to benchmark. I also know it’s one of the most overlooked and least understood metrics in business -- even though it’s one of the easiest to figure out.

Why is this particular number so important? Mainly because it will give you an idea of how much repeat business you can expect from a particular customer, which in turn will help you decide how much you’re willing to spend to “buy” that customer for your business. Once you know how frequently a customer buys and how much he or she spends, you will better understand how to allocate your resources in terms of customer retention programs and other services you’ll need to keep your customers -- and keep them happy. The simplest way to estimate lifetime value: Plug actual or estimated (if you’re in the planning stages or just starting out) numbers into the following equation: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer) An easy example would be the lifetime value of a gym member who spends $20 every month for 3 years. The value of that customer would be: $20 X 12 months X 3 years = $720 in total revenue (or $240 per year) Now you can see even from this hypothetical example why many gyms offer a free starter membership to help drive traffic. Gym owners know that as long as they spend less than $240 to acquire a new member, the customer will prove profitable in a short amount of time.

A good answer by Mr. wasi rehan above

Depends on which industry you're in.

However I like  Mr. Wasi Rahman Sheikh 's viewpoint.

One of the simplest mode of calculation is to acquire below value

1) Annual revenue per customer

2) Average number of years that a customer relationship with your business lasts

3) Initial cost of customer acquisition

The formula is as stated below

Anual revenue per customer x number of years – cost of customer acquisition

How do I calculate CLV?

Historic CLV

This is simply the sum of the gross profit from all historic purchases for an individual customer. Sum all gross profit values up to transaction N where transaction N is the last transaction a customer made with your store. If you have access to all your customer transactional data you can calculate this in Excel or, if you want to save time and have this calculated automatically through software, you should try a tool such as Ometria. 

CLV (Historic) = (Transaction1+Transaction2+Transaction3...+TransactionN) X AGM

AGM = Average Gross Margin

Calculating CLV based on net profit ultimately gives you the actual profit a customer is contributing to your store. This takes into account customer service costs, cost of returns, acquisition costs, cost of markeitng tools etc. The issue with this is that it can be highly complex to calculate this on an individual basis, especially if you want the figures to constantly be up to date. Gross margin CLV will still give you great insight into the true profitability of your customers to date.

Thanks

Colleague Wasi covered the question by his answer

agree with answer given by expert above