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What is customer lifetime value?
Customer lifetime value, or LTV, estimates the economic value one customer contributes across the expected relationship with a business. It can help a small business, SaaS company, online store, or subscription service compare customer groups and make planning assumptions.
In this calculator, Customer Lifetime Value is an expected gross profit contribution. It applies gross margin to customer lifetime revenue, so it is more informative than revenue alone but is not net profit.
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How to calculate customer lifetime value
Start with Average Purchase Value before gross margin. Multiply annual purchases by Average Customer Lifespan to estimate lifetime purchases, then calculate lifetime revenue and apply Gross Margin.
Purchase Frequency must be measured per customer per year. Purchase Frequency and Customer Lifespan should come from comparable historical data and consistent customer definitions.
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Customer lifetime value formula
Expected Lifetime Purchases = Purchase Frequency per Year × Average Customer Lifespan
Customer Lifetime Revenue = Average Purchase Value × Expected Lifetime Purchases
Customer Lifetime Value = Customer Lifetime Revenue × Gross Margin ÷ 100
Annual Revenue per Customer = Average Purchase Value × Purchase Frequency per Year
Annual Gross Profit per Customer = Annual Revenue per Customer × Gross Margin ÷ 100
Gross Profit per Purchase = Average Purchase Value × Gross Margin ÷ 100
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Lifetime value vs lifetime revenue
Customer Lifetime Revenue shows the expected total revenue received from a customer. Customer Lifetime Value here applies gross margin and shows expected gross profit contribution. Revenue and profit are not the same.
Repeated purchases can raise both figures, but high customer revenue does not guarantee high LTV when gross margin is low. Neither figure in this tool deducts Customer Acquisition Cost.
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Why gross margin matters in an LTV calculation
Gross margin is the share of revenue remaining after direct costs of providing the sold goods or services. Applying it prevents all customer revenue from being treated as economic value.
Two segments can produce the same revenue but different LTV when product mix, fulfillment, hosting, or service-delivery costs create different gross margins.
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How to estimate purchase frequency
Choose a representative historical period, count qualifying purchases, and divide by the number of customers represented. Convert the result to purchases per customer per year. For example, 600 purchases from 200 customers over six months implies about 6 purchases per customer per year.
Use the same rules for refunds, renewals, paused subscriptions, and repeat orders each time. Seasonal businesses may need a full year or longer to avoid a distorted frequency.
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How to estimate customer lifespan
Measure the time from first purchase to the end of active purchasing for comparable historical customers, then express the average in years. A fractional lifespan such as 2.5 years is valid.
Segment where practical. New and mature cohorts, product lines, subscription plans, and customer types can have materially different lifespans, and one average may hide those differences.
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Customer lifetime value calculation example
Suppose Average Purchase Value is $100, Purchase Frequency is 4 per year, Average Customer Lifespan is 3 years, and Gross Margin is 60%.
- Expected Lifetime Purchases: 4 × 3 = 12 purchases.
- Customer Lifetime Revenue: $100 × 12 = $1,200.
- Customer Lifetime Value: $1,200 × 60% = $720.
- Annual Revenue per Customer: $100 × 4 = $400.
- Annual Gross Profit per Customer: $400 × 60% = $240.
- Gross Profit per Purchase: $100 × 60% = $60.
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How to interpret customer lifetime value
There is no universal good LTV. Interpretation depends on Customer Acquisition Cost, gross margin, retention, purchase frequency, payback expectations, overhead, the business model, and the quality of the source data.
Compare LTV with CAC separately. This calculator does not calculate an LTV:CAC Ratio, and high LTV alone does not prove that a business or customer segment is profitable.
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Common LTV calculation mistakes
- Treating lifetime revenue as profit or gross profit.
- Combining purchase frequency and lifespan from non-comparable periods or customer populations.
- Counting purchases across all customers instead of purchases per customer per year.
- Using gross margin from a different product mix.
- Relying on one company-wide average when customer segments or cohorts behave differently.
- Treating an estimate as a guarantee of future customer value.
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Limitations of a simple LTV calculation
This model assumes Average Purchase Value, Purchase Frequency, and Gross Margin remain constant throughout the customer lifespan. Averages can hide meaningful differences between cohorts and customer segments.
It does not model churn by period, retention rate, discount rate, time value of money, CAC, taxes, overhead, net profit, or changes in behavior. The result is a planning and comparison reference, not a guarantee of future value.
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Frequently asked questions
What is customer lifetime value?
Customer lifetime value estimates the economic value one customer contributes over the full expected relationship. In this calculator, LTV means expected gross profit contribution after direct costs, but before acquisition costs, overhead, taxes, and financing.
What is the formula for customer lifetime value?
Multiply Average Purchase Value by Purchase Frequency per Year and Average Customer Lifespan to find lifetime revenue. Then multiply lifetime revenue by Gross Margin divided by 100 to estimate Customer Lifetime Value.
Is customer lifetime value based on revenue or profit?
Definitions vary, so always check the method. This calculator uses gross profit: it applies gross margin to expected lifetime revenue. It does not calculate net profit.
What is the difference between customer lifetime value and lifetime revenue?
Customer Lifetime Revenue is the expected total revenue from a customer. Customer Lifetime Value in this calculator is that revenue multiplied by gross margin, so revenue and value are not interchangeable.
Why does gross margin matter when calculating LTV?
Gross margin accounts for the direct cost of providing sold goods or services. A customer can generate high revenue but still have a modest LTV when the gross margin is low.
How do I estimate purchase frequency?
For a consistent historical period, divide qualifying purchases by the number of customers and convert the result to purchases per customer per year. Keep customer and purchase definitions consistent.
How do I estimate average customer lifespan?
Use comparable historical customer records to measure the average time between a customer's first and final active purchase, expressed in years. Avoid mixing segments with materially different buying patterns when possible.
Is a higher customer lifetime value always better?
Not by itself. Interpret LTV alongside customer acquisition cost, gross margin, retention, purchase frequency, payback expectations, overhead, the business model, and the quality of the source data.
Does this calculator include customer acquisition cost?
No. Customer acquisition cost is not deducted from LTV here. Calculate CAC separately before comparing acquisition spending with the gross profit contribution estimated by this tool.
What is the difference between LTV and LTV:CAC ratio?
LTV estimates value from one customer, while the LTV:CAC ratio divides LTV by Customer Acquisition Cost. This calculator calculates LTV only and does not calculate the LTV:CAC ratio.
Can I use this calculator for a subscription business?
Yes, if Average Purchase Value represents average subscription revenue per billing event, Purchase Frequency reflects billing events per customer per year, and lifespan is supported by comparable customer history.
What are the limitations of this LTV calculation?
It assumes purchase value, purchase frequency, and gross margin stay constant. It does not model churn by period, discount rate, time value of money, CAC, taxes, overhead, cohorts, customer segments, or changes in customer behavior.
Does changing Currency convert customer values?
No. Currency changes the symbol and display formatting only. Enter purchase values in the currency you want the monetary results to use.