How to use the customer lifetime value calculator
- Enter your average order value and how many orders a typical customer places in a year.
- Enter your gross margin, the share of each sale left after product and delivery costs. Using margin instead of revenue gives a value in profit.
- Choose how to describe customer lifespan: a number of years, or a yearly churn rate, in which case lifespan is 1 divided by churn.
- Open the advanced option to add your acquisition cost and get the LTV to CAC ratio and the payback time in months.
Formula
Customer lifetime value = order value x orders per year x gross margin x lifespan in years
Lifespan from churn = 1 / yearly churn rate
LTV to CAC ratio = lifetime value / cost to acquire a customer
Payback in months = acquisition cost / (yearly gross profit per customer / 12)
This is the simple, undiscounted form of the metric. It treats every year as equal and keeps the numbers easy to check by hand. More detailed models add discounting, changing order values and retention curves.
Worked example
A shop sells an average order of $60 and customers buy 4 times a year at a 40% gross margin. Each customer earns $60 x 4 x 40% = $96 in gross profit a year. Over a 3 year lifespan the lifetime value is $288, on $720 of revenue.
If instead 25% of customers leave each year, lifespan is 1 / 0.25 = 4 years and the value rises to $384.
With a $150 cost to win a customer, the ratio is 384 / 150 = 2.56 to 1. Monthly gross profit is $8, so the acquisition cost is earned back in 150 / 8 = 18.8 months.
Why use margin and not revenue
A customer who spends $720 over three years has not made you $720. Most of that pays for the product, shipping and payment fees. Gross profit is a more honest basis for deciding how much you can spend to win the customer.
If you do not know your margin exactly, use a rough figure and test a higher and a lower one. A small change in margin changes lifetime value in direct proportion, so it is worth getting close.
Reading the LTV to CAC ratio
The ratio compares what a customer earns with what it cost to find them. Many businesses aim for a ratio of about three to one, but there is no law, and the right level depends on cash, growth goals and how reliable your numbers are.
- Below 1 to 1 means each customer loses money over their lifetime at these assumptions.
- A very high ratio can mean you are spending too little on growth.
- Payback time matters too. A long payback ties up cash even when the ratio looks healthy.
- Churn is the hardest input to estimate. Try the result at a few churn levels to see how sensitive it is.
Assumptions and limits
- Order value, order frequency and margin are averages and stay the same every year.
- Lifetime value is gross profit before overhead, support costs, retention spending and taxes, and it is not discounted to today's money.
- Lifespan from churn assumes a constant yearly churn rate and uses 1 divided by the rate as the average lifespan.
- Nothing you enter leaves your browser.
Frequently asked questions
How do I calculate customer lifetime value?
Multiply average order value by orders per year and by gross margin, then by the average number of years a customer stays. This calculator shows the steps and also lets you work out lifespan from a yearly churn rate.
What is a good LTV to CAC ratio?
Three to one is a common rule of thumb, meaning a customer earns about three times what it cost to win them. It is not a standard. Consider payback time, cash on hand and how confident you are in the inputs before treating any ratio as good or bad.
Should I include repeat purchases only or the first order too?
Include every order a customer places, the first one too. If your first order has a very different value from later orders, calculate the average order value as the total spent divided by the total number of orders.
How do I find my churn rate?
Take the customers you had at the start of a year and count how many of them are gone by the end. Divide the lost customers by the starting count. For example, losing 250 of 1,000 customers is 25% yearly churn.