Customer lifetime value estimates how much profit a typical customer brings over their whole relationship with you. Different formulas give different answers, so the useful skill is knowing which variant you are using and why.
How it works
The simplest LTV is average order value x purchase frequency x customer lifespan. A margin-adjusted version multiplies that revenue by gross margin, giving profit rather than revenue. A churn-based version divides average revenue per period by the churn rate. All three are estimates, not facts, and they depend on averages that hide wide variation between your best and weakest customers.
Step by step
- Compute average order value: total revenue / number of orders.
- Compute purchase frequency: orders / unique customers in the period.
- Estimate average customer lifespan in the same time unit, or derive it from churn: lifespan = 1 / churn rate.
- Multiply order value x frequency x lifespan for revenue LTV.
- Multiply by gross margin for profit LTV.
- Compare with CAC, and segment LTV by channel or cohort before acting on it.
Worked example
Average order value is $60, customers buy 4 times a year, and average lifespan is 3 years. Revenue LTV = 60 x 4 x 3 = $720. At a 50 percent gross margin, profit LTV = $360. With a yearly churn rate of 33 percent, lifespan = 1 / 0.33 = 3 years, which matches. If CAC is $120, the profit LTV to CAC ratio is 360 / 120 = 3 to 1.
Common mistakes
- Reporting revenue LTV as profit, which overstates value by the margin.
- Using lifespan and churn from different periods, which double-counts or halves the result.
- Treating one average LTV as true for every customer. Segment before you spend.
- Extrapolating a short observation window into a long lifespan without evidence.
Try it with the free tool
You can follow every step above by hand, but the free tool below does the same calculation instantly. Try your own numbers in it, then check one result by hand so you trust the method as well as the answer. Open the full tool here: open the tool.
Checklist before you finish
- Write down every input number first, with its unit, before you calculate anything.
- Work through the steps in order, and do not skip the unit conversions.
- Check the answer against the worked example above: is it the right size, and does the direction make sense?
- Round only at the end, and keep the unrounded figure for any follow-up calculation.
Practice with your own numbers
Pick three cases of your own and work each one by hand. First, try a simple round-number case you can check mentally. Second, try a realistic case with awkward numbers, the kind you will actually meet. Third, try an edge case, such as a very small or very large input, and confirm the answer still behaves sensibly. If any case gives a surprising result, re-check the units and the formula step by step before you trust it.
If your answer looks wrong
Most errors come from a small set of causes. Check that you used the same units throughout, that you divided where the formula divides and multiplied where it multiplies, and that you applied any percentage as a decimal. Check the order of operations: powers and brackets come before multiplication and division, which come before addition and subtraction. Finally, test the method on the worked example in this guide. If your method reproduces the example answer, the method is right and the inputs deserve a second look.
Quick tips
Recalculate LTV by cohort, such as customers acquired in the same month, to see whether newer customers behave like older ones. A falling cohort LTV is a warning even when the blended LTV still looks fine.