Customer Lifetime Value Calculator
Lifetime value is average order value × purchases per year × years retained × gross margin. A $450 job twice a year for four years at a 45% margin is $1,620 of lifetime gross profit. Against a $540 acquisition cost that is a 3:1 ratio — the usual healthy mark.
Enter your customer economics
What a typical customer pays per transaction, after discounts.
Enter 1 for once a year, 0.5 for every other year, 12 for monthly.
Average lifespan. If you know your churn rate, use 1 divided by it.
Share of revenue left after materials, labour and delivery costs.
Optional. All sales and marketing spend divided by new customers won.
What one customer is worth to you after cost of delivery.
Across 8 purchases. Bigger number, less useful for decisions.
Around 3:1 is the conventional healthy mark.
How many jobs before the customer has covered what they cost to win.
How to use this calculator
Average order value is what a typical customer actually pays per transaction, after any discount. Purchases per year can be a fraction — a customer who books every other year is 0.5. Years a customer stays is your average lifespan; if you track churn, divide 1 by your annual churn rate to get it.
Gross margin turns revenue into profit, which is what makes the result comparable to acquisition cost. The last box is optional: enter what you pay to win a customer and the calculator shows the ratio between the two, which is the number that actually decides whether the marketing is working.
A worked example
A service company averages $450 a job. Customers book roughly twice a year and stay about four years, at a 45% gross margin. Lifetime revenue is 450 × 2 × 4 = $3,600 across eight jobs, and lifetime gross profit is 3,600 × 0.45 = $1,620.
Acquisition cost is $540, so the ratio is 3:1 — healthy. Note what it takes to hold that. Each job produces $202.50 of gross profit, so a customer needs three jobs before they have paid back what it cost to win them. Roughly eighteen months of that four-year relationship is spent repaying the marketing bill, which is a cash flow reality that the 3:1 ratio says nothing about.
What a good and a bad result look like
Judge the ratio, not the raw lifetime value. A $1,620 figure is excellent against a $400 acquisition cost and fatal against a $2,000 one. Around 3:1 leaves room for overheads and profit. Under 1:1 the business loses money on every customer and growth makes it worse, faster. Sitting at 8:1 usually means there is profitable growth being left on the table — the business could pay more per customer and win more of them.
The second thing to check is payback. A ratio can look fine while the money arrives so slowly that the business runs out of cash growing. If it takes eight purchases across three years to repay acquisition cost, the model works on paper and strangles the bank account.
The mistake almost everyone makes
- Using revenue instead of gross profit. It inflates lifetime value by the entire cost of delivery and produces acquisition budgets the business cannot fund.
- Optimistic lifespan. This input swings the result harder than any other. Guessing six years instead of four adds 50% to the answer with no evidence attached.
- Compounding three guesses. Order value, frequency and lifespan multiply, so three separately reasonable estimates can produce a result that is double reality.
- Averaging wildly different customers. One blended figure across a maintenance plan customer and a one-off emergency call describes neither. Segment before you decide anything.
- Treating it as fixed. Lifetime value is an output of how you price, serve and retain. It moves when you change any of those, and a price rise moves it twice.
Where to look next
Lifetime value only means something next to what a customer costs, so run the customer acquisition cost calculator and compare. If your customers genuinely buy more than once, your advertising break-even should be measured against lifetime profit rather than the first order — the break-even ROAS calculator handles the margin side of that. To work backwards to an affordable lead price, use the cost per lead calculator.
Common questions
How do you calculate customer lifetime value?
Multiply average order value by how many times a customer buys per year, then by how many years they stay, then by gross margin. A $450 job twice a year for four years at a 45% margin is 450 × 2 × 4 × 0.45 = $1,620 of lifetime gross profit. Skipping the margin step gives lifetime revenue, which is a bigger and much less useful number.
Should lifetime value be revenue or gross profit?
Gross profit, if the number is going to be compared against acquisition cost — which is the main reason to calculate it. Revenue-based lifetime value overstates what a customer is worth by exactly the cost of serving them, and a business with thin margins can look like it can afford to spend three times what it actually can. Report both if you like, but make the profit version the one decisions get made on.
What is a good LTV to CAC ratio?
Around 3 to 1 is the conventional healthy mark — enough surplus to cover overheads and still make a profit. Below 1 to 1 the business loses money on every customer it wins. Between 1 and 2 it is surviving but has no room for error. Far above 5 to 1 usually signals underinvestment rather than brilliance: there are probably more customers available at a price the business could comfortably pay.
How do you estimate customer lifespan?
If you have the history, take the reciprocal of your annual churn rate — losing 25% of customers a year implies an average lifespan of four years. If you do not, look at how long your oldest cohort of customers has actually stayed and use a deliberately conservative number. Lifespan is the assumption that swings this calculation hardest, so err low; an optimistic guess here can double the result and justify spending that was never affordable.
Does lifetime value work for one-off purchases?
It still applies, but the lifespan and frequency inputs collapse to one purchase, so lifetime value is simply the gross profit on a single sale. For a business like a roof replacement or a home sale, that is the honest answer, and the real lifetime value lives in referrals rather than repeat purchases. If referrals are material, model them as extra customers acquired at zero cost rather than inflating the lifespan figure.
Should lifetime value be discounted for time?
For anything beyond roughly two or three years, yes in principle — money arriving in year five is worth less than money arriving now, and a formal calculation applies a discount rate to future cash. In practice, most small businesses get a more useful result by keeping the arithmetic simple and using a conservative lifespan instead. Shortening an assumed lifespan from six years to four achieves much the same caution with far less argument.
Why does lifetime value get overestimated so often?
Because three optimistic assumptions multiply together. A slightly generous average order value, a slightly generous purchase frequency and a hopeful lifespan can each be off by 20% and produce a result that is nearly double reality. The result then gets used to justify an acquisition cost the business cannot actually afford, and the damage does not show up in the bank account for a year or more.
How do you increase customer lifetime value?
Retention first, because it compounds — every extra year multiplies against everything else in the formula. Then frequency: reminders, maintenance plans and service agreements bring customers back on a schedule rather than when something breaks. Then order value through bundling or a better-specified job. Raising prices lifts both order value and margin at once, which is why it is usually the fastest single move available.
Keep going
The other half of the ratio — what a customer costs once sales and marketing are both counted.
Free tool Break-Even ROAS CalculatorWith real repeat business, first-order break-even is too strict. See what your margin actually requires.
Free tool Cost Per Lead CalculatorWork backwards from lifetime value to the lead price your business can genuinely afford.
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