How to Calculate Customer Lifetime Value (With Worked Examples)

Customer lifetime value tells you how much a customer is worth to your business over the whole relationship, which is the number that should set your marketing budget, your retention priorities and your pricing. This guide walks through the formulas, from the simplest to the most accurate, with worked examples for three kinds of business.

Person working on a laptop at a wooden desk with notes beside them — Lifetime value turns "how much should we spend on marketing?" into a math problem.

Key takeaways

Lifetime value (LTV, sometimes CLV) is the total gross profit a customer generates over the time they stay with you.
Always use gross profit or contribution margin, never revenue, or you will overstate what you can afford to spend.
The simple formula works for steady subscription businesses. Retail and services need purchase frequency and observed cohorts.
Compare LTV with customer acquisition cost. A ratio of 3 to 1 is a common benchmark for healthy growth.

Most small businesses know what a sale is worth. Far fewer know what a customer is worth. The difference matters because a customer who spends $50 today and $50 a month for the next two years is worth 24 times more than the first sale suggests, and you can afford to spend accordingly to win them. Get the number wrong in the other direction and you will overspend on customers who never return.

There is no single correct LTV formula. There is a ladder of methods, each more accurate and more demanding than the last. Start at the rung your data supports and climb as you collect more.

The ingredients

Every LTV calculation combines some version of four inputs.

Input	What it means	Where to find it
Average revenue per customer per period	How much a typical customer spends per month or year	Revenue ÷ active customers
Gross margin or contribution margin	Share of revenue left after direct costs	Profit and loss statement, unit cost sheet
Purchase frequency	How often a customer buys in a period (retail and services)	Orders ÷ unique customers
Customer lifetime or churn rate	How long a customer stays, or what share leaves each period	Cohort reports, subscription data

Common mistake

Calculating LTV on revenue. A customer who pays $1,200 over their lifetime at a 30% gross margin is worth $360 to you, not $1,200. Marketing budgets set on revenue-based LTV are the most common way small businesses end up paying more to acquire customers than those customers ever return.

Method 1: the simple subscription formula

For a business with recurring billing and a reasonably steady churn rate, the shortcut is:

LTV = (monthly revenue per customer × gross margin) ÷ monthly churn rate

Dividing by churn gives the average lifetime in months. If 5% of customers leave each month, the average customer stays 1 ÷ 0.05, or 20 months.

Worked example: subscription software

Suppose a scheduling app charges $50 a month, has an 80% gross margin and loses 4% of customers each month. Monthly gross profit per customer is $50 × 0.80, or $40. Average lifetime is 1 ÷ 0.04, or 25 months. LTV is $40 × 25, which is $1,000. If the company spends $250 to acquire a customer, the LTV to CAC ratio is 4 to 1, and acquisition cost is paid back in about six months.

Where the simple formula goes wrong

The shortcut assumes churn is constant forever. In reality, churn is usually highest in the first few months and falls for customers who stay. It also ignores price increases, upgrades and downgrades. For a young business with under a year of data, this formula tends to overstate lifetime because early churn has not yet shown up. Discount the result or cap lifetime at 36 months until you have evidence of longer tenures.

Method 2: the purchase-frequency formula for retail and e-commerce

When customers buy at irregular intervals rather than on a subscription, build LTV from three parts:

LTV = average order value × purchases per year × gross margin × average customer lifetime in years

Worked example: online store

Imagine a specialty coffee retailer. Average order value is $42. The typical customer orders 5 times a year. Gross margin after product, packaging, shipping and payment fees is 38%. Looking at customers who first ordered three years ago, the average active lifetime is 2.2 years. LTV is $42 × 5 × 0.38 × 2.2, which comes to about $175. If the store's blended acquisition cost is $45, the ratio is close to 4 to 1. If it runs paid social campaigns at $90 per new customer, those campaigns return under 2 to 1 and deserve a second look.

Finding purchase frequency and lifetime

Export your order history with customer identifiers and first-order dates. Purchase frequency is total orders in the last 12 months divided by the number of unique customers who ordered in that period. Lifetime is harder: take the customers who first bought two or three years ago and measure how long they kept buying. Treat a customer as lost after a gap of two to three times their usual purchase interval.

Method 3: cohort-based LTV

The most accurate method skips averages and tracks real groups of customers over time. Group customers by the month they first bought. For each cohort, add up the gross profit they generated in month 1, month 2, month 3 and so on. The cumulative total per customer at any point is the observed LTV at that age.

Cohort analysis shows you three things averages hide: how quickly value accumulates (which drives payback), whether newer cohorts are better or worse than older ones, and where the curve flattens (which tells you the realistic lifetime). Most spreadsheet tools can build this from an order export with a pivot table.

Worked example: cohort table

Suppose the January cohort of 200 customers generated $4,000 of gross profit in their first month, $2,400 in month 2, $1,800 in month 3 and $1,400 in month 4. Cumulative gross profit per customer is $20 after month 1, $32 after month 2, $41 after month 3 and $48 after month 4. If acquisition cost was $45, this cohort paid itself back during month 4. Plot a few cohorts on the same chart and you will see immediately whether a change you made in March improved or hurt the curve.

Smiling cafe owner in an apron holding a handwritten sign outside a blue shop door — A regular who visits twice a week is worth far more than any single purchase shows.

Method 4: adding a discount rate

A dollar of gross profit three years from now is worth less than a dollar today, both because of the time value of money and because the future is uncertain. For planning decisions that run over several years, discount future gross profit. A simple way: divide each year's gross profit by (1 + r) raised to the power of the year number, where r is your discount rate. Many small businesses use 10% to 20% to reflect their cost of capital and risk.

Using the coffee retailer, annual gross profit per customer is $42 × 5 × 0.38, about $80. Over 2.2 years at a 15% discount rate, the discounted LTV is roughly $80 ÷ 1.15 for year one ($70), $80 ÷ 1.15² for year two ($60) and about $11 for the final 0.2 of a year, totaling around $141 rather than $175. Discounting rarely changes a decision unless lifetimes are long, but it keeps you honest.

25% to 95% The often-quoted range for how much profits can rise from a 5% improvement in customer retention, based on research by Frederick Reichheld of Bain & Company published in Harvard Business Review Results depend heavily on industry and margin structure. Use your own cohort data to estimate the effect for your business

How to calculate your LTV in seven steps

Choose the method your data supports. Subscription with steady churn: method 1. Retail or services with repeat orders: method 2. A year or more of order history: method 3.
Export customer-level data. You need a customer identifier, order dates and order values. Most e-commerce platforms, point-of-sale systems and invoicing tools can export this.
Calculate gross margin at the order level. Subtract product cost, shipping, payment fees, returns and any per-order labor. Use real figures from the last quarter.
Measure churn or lifetime from real cohorts. Avoid guessing. Even six months of cohort data is better than an assumption.
Compute LTV, then segment it. Break the number down by acquisition channel, product line, plan or region. The spread between segments is usually where the action is.
Compare with CAC. Calculate acquisition cost for the same segments and check the ratio and payback period.
Set a ceiling on acquisition spend. A common rule is to spend no more than a third of LTV to win a customer. Write that number down and give it to whoever runs marketing.

Using LTV once you have it

Marketing budgets. If LTV is $175 and you want a 3 to 1 ratio, the most you can pay per new customer is about $58. Channels above that cap need fixing or cutting.
Retention priorities. If cutting churn from 4% to 3% raises subscription LTV from $1,000 to $1,333, a $20,000 onboarding project pays for itself after the first 60 customers it saves.
Pricing. A price increase that loses a few customers but lifts gross profit per customer can raise LTV overall. Model it before you decide.
Customer service. Knowing that a long-standing customer is worth $1,000 makes a $50 goodwill gesture an easy call.
Investor and lender conversations. LTV to CAC is one of the first metrics investors ask for in any business that pays for growth.

Pro tip

Recalculate LTV every quarter and keep the old figures. A falling LTV, even while revenue grows, is an early warning that newer customers are less loyal, discounts are eroding margin or a competitor is pulling customers away sooner.

Simple formula

Takes minutes with three inputs
Good enough for steady subscription businesses
Easy to explain to a team or a lender

Cohort method

Needs clean customer-level data and a pivot table
Takes an afternoon to set up the first time
Reveals payback timing and trends the formula hides

Your LTV action plan

Export twelve months of orders with customer IDs and first-order dates
Calculate gross margin per order from real cost data
Measure churn or purchase frequency and lifetime from the export
Compute LTV using the method your data supports
Break LTV down by channel and compare each with its CAC
Set a maximum acquisition spend per customer and share it with your marketing team

Frequently asked questions

What is a good customer lifetime value?

There is no universal figure. LTV is only meaningful relative to acquisition cost and to your own history. A $200 LTV is excellent if customers cost $40 to acquire and poor if they cost $150.

Should I include referrals in LTV?

Some businesses add the value of customers a person refers. It is reasonable if you can measure referrals reliably, but keep it as a separate line so the core LTV stays comparable over time.

How do I calculate LTV for a service business?

Use method 2 with projects instead of orders: average project gross profit × projects per year × years a client stays. For a consultancy where clients buy two projects a year at $3,000 gross profit each and stay three years, LTV is $18,000.

How often should LTV be updated?

Quarterly is enough for most small businesses. Update it sooner if you change pricing, enter a new channel or see a shift in churn, since each of those moves the number.

The bottom line

Customer lifetime value is gross profit per period times how long customers stay, measured as honestly as your data allows. Start with the simple formula, move to cohorts as soon as you can and always compare the result with what you pay to win a customer. That one comparison will tell you more about where to spend than any marketing report.