Customer lifetime value (CLV or LTV) estimates how much a typical customer is worth to your business over the whole relationship. On its own it’s an interesting number. Compared with what it costs to win a customer, it becomes one of the most practical tools you have for deciding how much to spend on marketing.
The basic calculation
- Annual Gross Profit
- equals Average Order Value × Orders per Year × Gross Margin
- CLV
- equals Annual Gross Profit × Average Customer Lifespan
Use gross profit, not revenue. If a customer spends $1,000 but the products cost you $600, only $400 is available to cover marketing, overhead and profit.
Estimating lifespan
Lifespan is the hardest input. A common shortcut uses churn — the share of customers you lose each year:
- Average Lifespan
- equals 1 ÷ Annual Churn Rate
If you lose 25% of customers a year, the average customer stays about four years. For a young business without much history, be conservative.
Comparing value with acquisition cost
Customer acquisition cost (CAC) is your sales and marketing spend over a period divided by the number of new customers it produced. Two ratios follow:
- LTV:CAC — lifetime value divided by acquisition cost. A frequently cited benchmark is around 3:1. Much lower and growth may be unprofitable; much higher can mean you’re under-investing in growth.
- CAC payback — how many months of gross profit it takes to earn back the acquisition cost. Shorter payback means less cash tied up in growth.
An example
An office-supplies retailer’s business customers place three $150 orders a year at a 40% gross margin and typically stay four years. Each new account costs about $200 to win.
- Annual gross profit: $150 × 3 × 40% = $180.00
- CLV: $180.00 × 4 = $720.00
- LTV:CAC: $720.00 ÷ $200 = 3.6 : 1
- CAC payback: $200 ÷ ($180.00 ÷ 12) = 13.33 months
At roughly 3.6:1 with a payback under 14 months, the retailer can reasonably test spending more on acquisition — while watching that the ratio holds as it reaches less-ideal customers.
Ways to raise lifetime value
- Increase order value with bundles, tiers or complementary products.
- Increase frequency with reminders, subscriptions and replenishment.
- Improve margin through pricing and supplier terms.
- Reduce churn — usually the biggest lever — with better onboarding and service.
Try your own figures in the Customer Lifetime Value Calculator.
This guide is general information, not financial, tax or legal advice. See our disclaimer.