How to Calculate Customer Lifetime Value

Calculate CLV using revenue data, retention rates, and acquisition costs to measure long-term customer profitability.

1. Calculate average purchase value. Divide total revenue by number of purchases over a specific period. Use 12 months for stable businesses, 3-6 months if you're growing fast. Track this separately for different customer segments or product lines.
2. Determine purchase frequency. Divide total number of purchases by unique customers in the same period. B2B might be 2-4 times per year, subscription businesses show monthly frequency, retail varies widely by industry.
3. Measure customer lifespan. Calculate average retention period before customers stop buying. Divide 1 by your churn rate for subscription models. For transaction-based businesses, track time between first and last purchase across your customer base.
4. Factor in customer acquisition cost. Add up marketing spend, sales costs, and onboarding expenses, then divide by new customers acquired. Include salary allocation for sales staff. Subtract this from gross CLV to get net CLV.
5. Apply the CLV formula. Multiply average purchase value by purchase frequency by customer lifespan, then subtract acquisition cost. For subscription businesses, use: (monthly recurring revenue × gross margin %) ÷ monthly churn rate.
6. Set CLV tracking and thresholds. Calculate CLV monthly and track the CLV-to-CAC ratio. Healthy businesses maintain 3:1 or higher ratios. Flag customer segments with declining CLV and adjust acquisition spending when ratios drop below 2:1.