Two ways to work out LTV
Customer lifetime value is the gross profit one customer brings in from their first purchase to their last. The calculator offers two methods, depending on how you sell.
Repeat orders, for shops and services where people buy again and again:
- Lifetime revenue = average order value x orders per year x years as a customer
- LTV = lifetime revenue x gross margin
Subscription, for software and memberships billed each month:
- Average lifetime in months = 100 / monthly churn %
- LTV = monthly revenue per customer x lifetime in months x gross margin
Both methods then divide LTV by your customer acquisition cost to give the LTV to CAC ratio.
A worked example
A software tool charges $49 a month. Each month 4% of customers cancel, so the average customer stays 25 months and pays $1,225 in total. With a 60% gross margin, LTV is $735.
The company spends $150 in ads and sales time to win each new customer. LTV to CAC is 735 / 150, about 4.9 to 1. That leaves room to spend more on growth.
Why the ratio matters
LTV on its own does not tell you much. What matters is how it compares with the cost of winning the customer. A ratio near 3 to 1 is a common target. Under 1 to 1, every new customer loses money. Far above 5 to 1 can mean you are spending too little on growth and leaving customers for competitors to win.
Keeping the estimate honest
- Use real churn or repeat-purchase data from at least six months of customers, not a hopeful guess.
- Use gross margin, not revenue. Payment fees, hosting and support costs all come out first.
- Work out LTV for each channel. Customers from search often stay longer than those from discount ads.
