Customer Lifetime Value (LTV) Calculator

Enter what an average customer spends, how often they buy, your gross margin, and how many stick around each year. You'll get lifetime value on both a revenue and a profit basis, discounted to today's money, plus your LTV to CAC ratio and payback period.

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How customer lifetime value works

Lifetime value answers one question: how much is a customer worth to you in total, and therefore how much can you afford to pay to get one? Everything else is detail. The detail matters, though, because the three most common shortcuts all push the number in the same direction, which is up.

The first shortcut is using revenue instead of gross profit. Revenue LTV will cheerfully tell you a customer is worth $2,000 when the goods cost you $1,400, and it will justify an acquisition budget that quietly bleeds you. The second is ignoring time: money arriving in year five is not worth what money arriving today is worth, and a five-year LTV that has not been discounted is a forecast wearing the costume of a fact. The third is treating retention as one flat rate, which is the one nobody talks about, and it is covered further down.

This calculator handles all three. It projects an actual year-by-year retention curve, applies your margin, discounts each future year back to today, and shows you the shortcut version alongside so you can see exactly how much optimism you were carrying.

The formula

LTV = ∑ (Annual gross profit × Share still active in year t) ÷ (1 + d)t-1

Annual gross profit is average order value × purchases per year × gross margin. The share still active is 100% in year 1, your first-year retention rate in year 2, and then multiplied by the ongoing retention rate for each year after. d is your annual discount rate, and year 1 is not discounted because that money arrives now. The familiar textbook shortcut, LTV = annual gross profit ÷ (1 − retention), is the same idea with no discount rate and an infinite horizon, which is why it always comes out larger.

Worked example

An online shop has an $80 average order, customers buy 2.5 times a year, gross margin is 60%, first-year retention is 40%, retention after that is 65%, over a 3 year horizon at a 10% discount rate. Acquisition cost is $60.

Annual revenue per active customer is 80 × 2.5 = $200, and annual gross profit is $120. Year 1 contributes $120. Year 2 has 40% still buying, so $48, discounted to $43.64. Year 3 has 40% × 65% = 26% still buying, so $31.20, discounted to $25.79.

Total: $189.42 of gross profit per customer, against $315.70 of revenue. That is an LTV to CAC ratio of 3.16 to 1, with the $60 acquisition cost repaid after about 6 months. The old shortcut ($120 ÷ 0.60) would have said $200.

The first-year cliff, and why one retention rate lies

Ask a business its retention rate and you will get a single blended number, usually somewhere in the 50s or 60s. That number is an average of two very different populations: brand new customers, who mostly leave, and established customers, who mostly stay. Getting someone to buy a second time is by far the hardest step in the whole relationship. Once they have bought three or four times, they behave like a different species.

Blending those two into one rate does real damage in both directions. It overstates how much a new customer is worth, which is exactly the number you use to set acquisition budgets, and it understates your loyal core, which is the number you use to justify retention spending. That is why this calculator asks for two rates. If you only know one, leave the second blank and the math falls back to a single rate, but the honest move is to pull the two numbers separately from your order history. It usually takes twenty minutes and it usually changes the answer.

Using LTV as a bidding input

If you are feeding values into Google Ads, Meta, or any bidding system that optimizes toward conversion value, use the profit-based, discounted figure, and use the same basis for every conversion action you report. Bidding algorithms do not care whether your absolute numbers are right; they care intensely whether your numbers are right relative to each other. A purchase valued on revenue and a lead valued on profit will quietly teach the system to chase the wrong one.

One warning about horizon. Feeding a 10 year LTV to a system whose feedback loop is 30 days is not wrong, but it does mean your reported return on ad spend describes a decade while your bank account describes a month. Most advertisers are better served by a 2 to 3 year horizon: long enough to capture the repeat business that justifies the spend, short enough that you would actually bet cash on the forecast.

Frequently asked questions

How do you calculate customer lifetime value?

The short version: annual gross profit per customer multiplied by how many years that customer keeps buying. This calculator does it properly by tracking a retention curve year by year and discounting future years back to today's money, because a dollar you collect in year five is not worth a dollar today.

What is a good LTV to CAC ratio?

3 to 1 is the number most investors and operators use as healthy: you get back three dollars of gross profit for every dollar of acquisition cost. Below 1 to 1 you are losing money on every customer. Above 5 to 1 usually means you are underspending on growth, not that you are winning.

Should LTV use revenue or profit?

Profit, almost always. Revenue LTV flatters you and will happily justify an acquisition cost that bankrupts you. Use gross profit (revenue minus cost of goods and direct fulfillment) so the number answers the real question: how much can I afford to pay for this customer?

Why does the calculator use two retention rates?

Because the first year is not like the others. Getting a brand new customer to buy a second time is much harder than keeping a customer who has already bought twice, so a single blended rate overstates early value and understates late value. Enter your first-year rate and, if you know it, your ongoing rate for everyone who survives that first year.

What discount rate should I use?

Somewhere between 8% and 15% for most small and mid-sized businesses, which roughly reflects what your money could earn elsewhere plus the risk that the forecast is wrong. If you leave it blank the calculator uses 0% and simply adds the years up, which is the standard textbook LTV and will always be the larger number.

How long a horizon should I model?

Three years is the honest default for most businesses. Longer horizons produce bigger numbers that are mostly guesswork, and no bank, board, or bidding algorithm should be asked to trust a year-seven retention estimate from a company that is four years old.

Can I use this LTV as a Google Ads conversion value?

Yes, and it is one of the best uses for it. Feed the profit-based, discounted figure rather than the revenue figure, and keep the basis consistent across every conversion action you report. See the email signup value calculator for how to turn LTV into a value for a signup, which is a fraction of a customer rather than a whole one.

What is the difference between LTV and CLV?

Nothing. LTV, CLV, and CLTV are the same metric under different initials. The only distinction worth caring about is whether a given number is measured on revenue or profit, and over what time horizon, which is why both are labeled explicitly here.

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