How to Calculate Customer Lifetime Value
Customer Lifetime Value (CLTV or CLV) is the total revenue or profit a customer generates throughout their relationship with your company. It's the most important metric for determining how much you can afford to spend on customer acquisition.
The Basic CLTV Formula
Step-by-Step Calculation
Step 1: Calculate Average Purchase Value
Divide total revenue by number of purchases over a specific period:
Example: $250,000 revenue ÷ 1,000 orders = $250 average purchase value
Step 2: Determine Purchase Frequency
Calculate how many times per year an average customer makes a purchase:
Example: 1,000 orders ÷ 500 unique customers = 2 purchases per customer per year
Step 3: Estimate Customer Lifespan
Average number of years a customer continues buying from you. Calculate as 1 ÷ Churn Rate:
Example: 20% annual churn = 1 ÷ 0.20 = 5 years average lifespan
Step 4: Apply the Formula
Complete Example
- Average Purchase Value: $250
- Purchase Frequency: 2 times per year
- Customer Lifespan: 5 years
- CLTV = $250 × 2 × 5 = $2,500
Each customer generates $2,500 in revenue over their lifetime.
Alternative Formula for SaaS/Subscriptions
For subscription businesses, use this simpler formula:
CLTV Benchmarks by Industry
| Industry | Typical CLTV | Customer Lifespan |
|---|---|---|
| B2B SaaS (SMB) | $5,000-$15,000 | 2-4 years |
| B2B SaaS (Enterprise) | $50,000-$250,000+ | 5-7 years |
| E-commerce | $500-$3,000 | 1-3 years |
| Professional Services | $10,000-$100,000 | 3-7 years |
| Telecom/Utilities | $1,000-$5,000 | 3-10 years |
| Insurance | $5,000-$20,000 | 5-15 years |
Understanding the CLTV:CAC Ratio
The relationship between CLTV and CAC (Customer Acquisition Cost) determines business viability:
| Ratio | Health | What It Means |
|---|---|---|
| 5:1+ | Excellent | Very profitable, room to invest more in growth |
| 3:1 to 5:1 | Good | Healthy unit economics, sustainable growth |
| 2:1 to 3:1 | Acceptable | Marginally profitable, needs optimization |
| 1:1 to 2:1 | Poor | Barely breaking even, immediate action needed |
| Below 1:1 | Unsustainable | Losing money on each customer acquired |
Strategies to Increase CLTV
1. Increase Average Order Value
- Implement cross-selling and upselling
- Create product bundles
- Offer premium tiers or add-ons
- Implement minimum order thresholds for free shipping
2. Increase Purchase Frequency
- Launch loyalty programs
- Send personalized product recommendations
- Create subscription or replenishment options
- Implement email nurture campaigns
3. Extend Customer Lifespan
- Improve onboarding and time-to-value
- Provide exceptional customer service
- Build community and engagement
- Proactively address churn signals
- Offer annual contracts with discounts
4. Optimize Profit Margins
- Increase prices strategically
- Reduce cost of goods sold
- Automate support and operations
- Negotiate better supplier contracts
Common CLTV Mistakes to Avoid
Using Revenue Instead of Gross Profit
If you have 40% margins, your profitable CLTV is only 40% of revenue CLTV. Use gross profit to make accurate CAC spending decisions.
Not Segmenting by Customer Type
Enterprise customers often have 5-10x higher CLTV than SMB. Calculate separate CLTV for each segment to allocate marketing budget correctly.
Ignoring Discount Rates
Revenue earned in year 5 is worth less than revenue today due to time value of money. For precise calculations, apply a discount rate (typically 10-15%) to future cashflows.
Overestimating Customer Lifespan
Be conservative. It's better to underestimate CLTV and be pleasantly surprised than overspend on acquisition based on optimistic projections.