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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.
Simple CLV preserves the direct lifespan formula. Churn-Based CLV uses monthly retention probabilities, while Discounted CLV also recognizes that future customer value is worth less than value received today.
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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.
For churn-dependent modes, enter monthly churn rather than a lifespan. The calculator converts annual customer revenue and gross profit into monthly amounts so it never combines annual revenue directly with monthly churn.
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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
Monthly Retention = 1 − Monthly Churn Rate
Expected Lifetime in Months = 1 ÷ Monthly Churn Rate, when churn is above zero
Expected Gross Profit in Month t = Monthly Gross Profit × Survival Probability in Month t
Discounted CLV= Sum of each month's Expected Gross Profit ÷ (1 + Effective Monthly Discount Rate)t
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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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Simple CLV 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: 12 purchases.
- Customer Lifetime Revenue: $1,200.00.
- Customer Lifetime Value: $720.00.
- Annual Revenue per Customer: $400.00.
- Annual Gross Profit per Customer: $240.00.
- Gross Profit per Purchase: $60.00.
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Churn and discounted CLV example
Suppose a customer spends $120 monthly, Gross Margin is 70%, Monthly Churn is 4%, and the Annual Discount Rate is 10%. The monthly gross profit is $84.00.
- Estimated lifetime: 25 months.
- Churn-based CLV: $2,100.00.
- Discounted CLV: $1,750.94.
- 12 months discounted value: $775.65.
- 24 months discounted value: $1,207.70.
- 36 months discounted value: $1,448.35.
These example outputs come from the same production engine as the calculator, chart, checkpoints, and sensitivity table.
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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 using the Customer Acquisition Cost Calculator, which calculates LTV:CAC, payback, and a maximum CAC from your target ratio. This dedicated LTV tool offers a deeper purchase-frequency model; high LTV alone does not prove profitability.
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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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How churn and retention shape CLV
Monthly survival starts at 100% for the first projected month and then follows Retentiont−1. Higher churn lowers retention, shortens expected lifetime, and reduces the number of future periods contributing value. Low churn has the opposite effect, which also makes long-range estimates more sensitive to small changes in the churn assumption.
Constant churn is a simplified steady-state model. Real cohorts can have onboarding churn, renewal cliffs, reactivation, and retention rates that change with tenure, so segment or cohort analysis may be more appropriate for material decisions.
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Discounting and projection methodology
Discounted CLV converts the annual effective discount rate to an effective monthly rate using (1 + annual rate)1/12− 1. Each month's survival-weighted gross profit is then discounted to present value. The calculator does not divide Simple CLV by one plus the discount rate.
Projections stop when survival is practically zero or at a hard maximum of 1,200 months. If zero or very low churn reaches that boundary, the result identifies the modeled horizon without presenting it as the mathematical customer lifetime.
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Limitations of CLV models
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.
Churn-based modes model one constant monthly churn rate and the Discounted mode models a constant annual discount rate. None of the modes model taxes, overhead, net profit, expansion revenue, changing margins, or behavioral changes. CAC remains a supporting comparison, not a replacement for acquisition analysis. Results are planning references, not guarantees.
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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?
Simple CLV multiplies Average Purchase Value by Purchase Frequency per Year, Customer Lifespan, and Gross Margin. Churn-based CLV instead sums monthly expected gross profit weighted by customer survival.
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.
How does churn affect customer lifetime value?
In the constant-churn model, monthly retention equals 1 minus monthly churn and expected lifetime equals 1 divided by the monthly churn rate. Higher churn makes survival decline faster and normally lowers CLV.
What is discounted customer lifetime value?
Discounted CLV is the present value of expected future customer gross profit. The calculator converts the annual effective discount rate to an effective monthly rate and discounts each projected month separately.
Why is discounted CLV usually lower than churn-based CLV?
With a nonnegative discount rate, gross profit expected farther in the future has a lower present value. A zero discount rate makes the discounted result equal the comparable undiscounted churn-based result.
Does this calculator include customer acquisition cost?
Yes, as a supporting comparison. Enter CAC to see CLV:CAC ratio, gross profit after CAC, and payback against projected cumulative gross profit. Use the dedicated CAC Calculator for acquisition-channel and spending analysis.
What is the difference between CLV and CLV:CAC ratio?
CLV estimates customer gross-profit value. CLV:CAC divides that value by Customer Acquisition Cost; it is unavailable when CAC is zero because division by zero is undefined.
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?
The models assume purchase value, purchase frequency, and gross margin stay constant. Churn-based modes assume one constant monthly churn rate and do not model cohorts, expansion, reactivation, taxes, overhead, or changing 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.