How to calculate LTV

The simple LTV formula

Customer lifetime value answers one question: how much is a customer worth across their whole relationship with you, beyond the first sale. The simplest version, and the one this calculator uses, multiplies three numbers you can pull from your sales data:

• Average order value (AOV). Total revenue divided by the number of orders over a period. If you do not know yours, work it out with the AOV calculator.
• Orders per year. How often a typical customer buys in a year. A coffee subscriber might order monthly (12); a furniture buyer once or twice.
• Customer lifespan. The average number of years a customer keeps buying before they lapse.

Put together, LTV = AOV x orders per year x customer lifespan in years. It is a clean way to size a customer when you sell discrete orders and have a rough sense of how long people stick around. The result is a revenue figure: the total a customer is expected to spend, before you take out the cost of serving them.

A worked example

Take the calculator's default inputs. A customer spends 60 per order, places 4 orders a year, and stays with you for 3 years on average:

• Revenue per year: 60 x 4 = 240.
• Lifetime revenue: 240 x 3 = 720.

So the simple LTV is 720. That is the gross revenue one customer brings in over three years. It is the right number for sizing the value of your base, but on its own it overstates what a customer is worth to you, because it counts the money you spend fulfilling those orders. The next two versions fix that.

The margin-adjusted version

The single most useful refinement is to multiply by your gross margin: the share of each sale left after the cost of the goods or service sold. That converts revenue LTV into gross-profit LTV, which is the money a customer actually leaves in your business and the most you could ever spend to acquire them.

• Revenue LTV: 720 (from the example above).
• At a 50% gross margin: 720 x 0.50 = 360 in gross profit.

The difference is large and it matters. If you used the 720 revenue figure to set your acquisition budget, you would think you could spend far more to win a customer than the 360 of profit they really generate. For any decision about what to pay for a customer, use the margin-adjusted figure. Use the raw revenue figure only when you genuinely mean top-line revenue, such as forecasting sales.

The SaaS retention version

Subscription and SaaS businesses rarely think in orders. They bill on a recurring cycle and lose customers to churn, so lifespan is better estimated from the churn rate than guessed in years. The standard subscription formula is:

LTV = (ARPA x gross margin) / customer churn rate

ARPA is average revenue per account for the period (monthly or annual). The churn rate for the same period sets the lifespan: its reciprocal is the average number of periods a customer stays. A 5% monthly churn implies an average life of 1 / 0.05 = 20 months. So an account paying 100 a month at an 80% gross margin has an LTV of (100 x 0.80) / 0.05 = 1,600. This is the same idea as the simple formula, with churn standing in for orders and lifespan, and margin built in so the answer is already gross profit. Pick a churn period and stick to it: do not mix a monthly churn rate with an annual ARPA.

What to include, and the revenue-versus-margin mistake

Two judgment calls decide whether your LTV is honest or flattering.

• Use profit, not revenue, for acquisition. This is the mistake almost everyone makes. Multiplying AOV, frequency and lifespan gives a revenue number, and it is tempting to treat it as spendable. It is not. Revenue includes the cost of every order you shipped. Apply your gross margin so the LTV reflects the profit a customer leaves behind, which is what you can reinvest in winning the next one.
• Count the cost of serving, not the cost of acquiring. Gross margin should net out the direct cost of delivering the product or service: goods, payment fees, support, hosting. Do not subtract the marketing cost of acquiring the customer here, that is CAC, and it belongs on the other side of the comparison. Subtracting it inside LTV double-counts it.
• Be conservative on lifespan. Lifespan and churn are estimates, and small changes swing the answer a lot. If you are unsure, use a shorter lifespan or a higher churn rate. An LTV that turns out too low is a safe planning error; one that is too high leads you to overpay for customers.

Why LTV is only useful next to CAC

On its own, an LTV figure does not tell you whether your growth is healthy. A customer worth 360 in gross profit is good news only if you paid meaningfully less than that to acquire them. The number that completes the picture is customer acquisition cost (CAC): your total sales and marketing spend divided by the new customers it won.

The standard way to read the two together is the LTV:CAC ratio. The common convention is about 3:1, meaning a customer is worth roughly three times what you paid to acquire them. Around 1:1 you are barely covering acquisition; well above 3:1 you may be under-spending and leaving growth on the table. Work the ratio with the LTV:CAC calculator, and for what each band means and why the target is 3, read what is a good LTV:CAC ratio. The ratio is most meaningful when the LTV side is measured on gross profit, not revenue, so the margin step above is what makes the comparison fair.

Which LTV model to use

The three versions answer slightly different questions. Pick by what you sell and what you need the number for.

The calculator runs the simple model so you get an answer from numbers you already have, then reports the gross-profit figure and the maximum healthy CAC alongside it. Whichever model fits your business, hold the inputs consistent and treat any benchmark you read elsewhere as a convention rather than a fixed target.

Frequently asked questions