The formula
Customer lifetime value = average order value x orders a year x years a customer stays
Lifetime value on gross margin = customer lifetime value x your gross margin
How to calculate customer lifetime value on your own numbers
You need three numbers from last year's sales. Average order value is your revenue divided by your orders. Orders a year is your orders divided by the customers who placed them. Years a customer stays is the hard one, so work it from churn: divide 1 by the share of customers you lose in a year.
Worked example, with made-up figures: last year a small print shop took $192,000 from 2,400 orders, placed by 400 customers. Its average order value is $192,000 / 2,400 = $80, and each customer ordered 2,400 / 400 = 6 times. It loses about a quarter of its customers each year, so a customer stays about 1 / 0.25 = 4 years. Lifetime value is $80 x 6 x 4 = $1,920.
Lifetime value on gross margin: the figure to plan with
Revenue isn't what you keep. Take off what each order costs you to make or deliver, and what's left is the number to plan spending with.
Worked example, with the same made-up shop: its gross margin is 40%, so lifetime value on gross margin is $1,920 x 40% = $768. That's what one customer leaves you after paying for what they bought, before rent, pay and marketing.
How much can you spend to win a customer?
Put lifetime value on gross margin next to your customer acquisition cost, what it costs to win one new customer. The gap between the two is what each customer leaves to pay for everything else.
Worked example, with the same made-up shop: winning a new customer costs it $300 in ads, samples and the owner's time. $768 / $300 = 2.56, so each customer brings back about $2.56 of gross profit for every $1 spent winning them, and $768 - $300 = $468 is left over. A customer is worth $80 x 6 x 40% / 12 = $16 a month in gross profit, so the $300 takes 300 / 16 = 18.75 months, about 19, to earn back.
That first number is the LTV to CAC ratio. We don't print a target for it. What's left over has to cover your own rent, pay and cash gaps, and those are yours. Check two things instead: the gap is comfortably positive, and the cost is earned back well before a customer usually leaves.
What is a good customer lifetime value?
We don't print an industry figure. Lifetime value is set by what you sell, what it costs you and how long your customers stay, so another business's number says nothing about yours. Good is well above what a customer costs to win, and higher than last year's.
| Who's looking | What they check | What good looks like |
|---|---|---|
| Owner | Lifetime value on gross margin against CAC | Well above it, with the cost earned back long before a customer usually leaves |
| Sales or account manager | Orders a year and years kept, by where customers came from | Both steady or rising, quarter on quarter |
| Whoever looks after customers | Customers due a reorder with no follow-up dated | None left on that list at the end of the week |
How to raise lifetime value with the customers you already have
Each of the three numbers is a lever, and two of them come down to follow-up.
Worked example, with the same made-up shop: one more order a year makes it $80 x 7 x 4 = $2,240, or $896 on gross margin, $128 more per customer. Keeping each customer one more year makes it $80 x 6 x 5 = $2,400, or $960 on gross margin, $192 more.
- Date the next order when you deliver this one. A follow-up on the day a customer usually reorders adds orders a year.
- Call the customers who've gone quiet. Someone who ordered every two months and hasn't in four is close to leaving, and years kept is the lever worth most.
- Show the fuller option first, with the smaller one beside it, so the average order rises without a discount.
- Work lifetime value out by where customers came from. Referrals, ads and walk-ins can bring customers who stay very different lengths of time.
Work out your customer lifetime value
Lifetime value: $1,920
- On gross margin: $768
- $2.56 of gross profit for each $1 of CAC
- Left after CAC: $468
Where it shows up in your week
Lifetime value grows with every reorder someone remembered to ask for. A follow-up takes one line to add, with its date, and brings a reminder when you give it a time.
Related KPIs, terms and tools
Questions managers ask
Sources
The page states no outside figure, so there's nothing to cite here.