How to use the customer lifetime value calculator
- Enter the average order value and how many times a customer buys per year.
- Enter your gross margin so CLV reflects profit rather than revenue.
- Choose average customer lifespan in years, or an annual churn rate.
- Optionally add a discount rate for discounted CLV and your CAC for the CLV:CAC ratio.
Worked example
$50 orders, 4 a year, 60% margin, 3-year lifespan, 10% discount rate, $100 CAC
Each customer brings $200 revenue and $120 gross margin a year. Simple CLV is $360. Discounting each year at 10% gives $298.42, so CLV:CAC is about 2.98:1. With 25% annual churn instead of a fixed lifespan, the expected life is 4 years, simple CLV is $480 and discounted CLV is $342.86.
How it works
Annual gross margin M = order value × purchases per year × gross margin. Simple CLV = M × lifespan, where lifespan = 1 ÷ churn in churn mode. Discounted CLV assumes margin arrives at the end of each year: in lifespan mode it is Σ M / (1 + d)t over the years of the lifespan (a partial final year counts proportionally); in churn mode, with retention r = 1 − churn, it is M / (1 + d − r). CLV:CAC uses discounted CLV when a discount rate is set, otherwise simple CLV.
Assumptions
- Order value, frequency, margin and retention are constant over the customer’s life.
- Churn is an annual rate; convert a monthly churn m with 1 − (1 − m)^12.
- All inputs are your own figures.
Frequently asked questions
Should CLV use revenue or gross margin?
Gross margin, if you are comparing CLV with acquisition cost, because revenue includes costs you have to pay to serve the customer. Set margin to 100% if you want revenue-based CLV.
What CLV:CAC ratio should I aim for?
A ratio above 1 means a customer is worth more than it costs to acquire. Many businesses aim well above that to cover overheads, but the right target depends on your cash position and growth plans.
Why discount future value?
Money received in future years is worth less than money today. Discounting at your cost of capital gives a more conservative figure for decisions like how much to spend on acquisition.
Limitations
- A simple cohort-average model; it does not predict individual customer value.
- Does not model expansion revenue or changing retention over time.