How customer lifetime value is calculated
Customer lifetime value (LTV or CLV) is the total revenue, or better the gross profit, an average customer brings in before they stop buying. The simple version multiplies three numbers: what they spend per order, how many orders they place each year, and how many years they stay.
Worked example
A store sells orders averaging $60. Customers buy 3 times a year and 25% stop buying each year, so the average lifespan is 4 years. Revenue LTV is $60 × 3 × 4 = $720. At a 40% gross margin, each customer is worth $288 in gross profit over their lifetime, or $72 per year.
Use profit, not just revenue
Revenue LTV looks bigger, but you pay for products, shipping and fees out of it. Gross profit LTV is the figure to compare with what it costs to acquire a customer. The LTV to CAC calculator does that comparison and shows your payback period.
Limits of the simple formula
The calculation assumes every customer behaves like the average one and that churn stays constant. Customers who buy repeatedly are usually worth far more than one-time buyers, so if you can split your data by segment, run the calculator for each. Treat the result as an estimate and update it as your data grows.
Frequently asked questions
What is customer lifetime value?
It is the total revenue or gross profit a typical customer generates for your business over the whole time they keep buying from you.
How do I calculate LTV from churn?
Divide 100 by your yearly churn rate to get the average lifespan in years, then multiply by yearly spend. With 25% churn the lifespan is 4 years.
Should I use revenue or profit for LTV?
Profit. Revenue ignores the cost of the products you sell, so it overstates what a customer is worth. Use gross profit when you compare LTV with acquisition cost.
What is a good LTV?
There is no universal figure. A good LTV is one that comfortably exceeds what you pay to acquire a customer. The LTV to CAC calculator shows how yours compares.