How to Calculate Customer Lifetime Value (LTV)

Customer lifetime value formula

A simple revenue-based LTV model combines how much customers spend, how often they buy, and how long they remain customers.

The second version is often more useful for business decisions because it converts customer revenue into an estimate of gross profit before acquisition cost and overhead. You can enter your own assumptions in the Customer Lifetime Value Calculator.

Worked LTV example

Assume the average customer spends $80 per order, makes 4 purchases per year, remains a customer for 3 years, and the business earns a 60% gross margin.

The customer is expected to generate $960 of lifetime revenue and about $576 of gross profit under these assumptions. The $576 figure is more informative when deciding how much the business can afford to spend on acquisition.

Revenue LTV vs profit-based LTV

Revenue LTV can look impressive while hiding weak economics. If two customer groups each generate $1,000 of lifetime revenue but one has a 70% gross margin and the other has a 25% margin, their economic value is very different. State clearly which version you use whenever you report LTV.

If you need to estimate the margin behind your sales, use the Profit Margin Calculator. Consistent definitions matter more than choosing the most flattering LTV number.

How to estimate each LTV input

• Average purchase value: divide relevant revenue by the number of purchases or orders in the same period.
• Purchase frequency: estimate the average number of purchases per customer per year or another consistent period.
• Customer lifespan: estimate how long an average customer remains active. Subscription businesses can often derive this from churn or retention data.
• Gross margin: use a consistent margin definition that reflects the direct costs required to deliver the product or service.

LTV and CAC: evaluate them together

LTV tells you what a customer may generate; customer acquisition cost tells you what you spent to acquire that customer. A business with $576 profit-based LTV and $100 CAC has more economic room than one with the same LTV and $500 CAC. Calculate acquisition cost with the CAC Calculator or see our step-by-step CAC guide.

Do not rely on an LTV-to-CAC ratio alone. A customer may eventually be profitable but take too long to repay acquisition spend. Cash flow, payback period, refunds, support costs and overhead can all change the decision.

Why retention can have a large effect on LTV

When customers stay longer, they have more opportunities to make repeat purchases. In a simple model, increasing average lifespan from three to four years increases the lifespan component by one third if purchase value and frequency remain unchanged. That is why retention improvements can raise LTV without increasing acquisition volume.

Be cautious with this sensitivity: extending historical behavior too far into the future can overstate value. Use observed cohorts when possible and update assumptions as newer retention data becomes available.

Common LTV mistakes

• Calling revenue profit. Revenue-based LTV does not account for the cost of delivering the product or service.
• Mixing time units. Monthly purchase frequency paired with lifespan in years can inflate the result unless units are converted.
• Using one average for very different customers. New, repeat, subscription, enterprise and consumer customers may have materially different economics.
• Assuming historical retention lasts forever. Products, pricing, competition and customer behavior change.
• Ignoring acquisition payback. A strong projected LTV does not solve a near-term cash-flow problem if value arrives slowly.

How to use LTV in business decisions

Use LTV as an estimate, not a guarantee. Track it by meaningful customer cohort, keep the formula consistent, and compare changes in purchase value, frequency, retention and margin. Then combine LTV with CAC and payback period when setting acquisition budgets. This makes the metric a decision tool rather than a vanity number.