How to Calculate Customer Lifetime Value

How to calculate LTV depends on what data you have and what kind of business you run, so this guide gives five methods with worked examples you can reproduce: the simple subscription formula, a discounted version, a repeat-purchase formula for retail and ecommerce, a cohort projection with a capped tail, and a version that includes expansion revenue. Every example uses stated hypothetical numbers and checked arithmetic. It supports unit economics and budgeting and forecasting, follows customer lifetime value and blended CAC vs. paid CAC, and leads to the LTV to CAC ratio and CAC payback period.

Before you start

Decide three things.

1. Margin basis. Use contribution margin or gross margin after variable costs, never revenue.
2. Time horizon. Choose a cap, such as 24 or 36 months, and state it.
3. Customer group. Calculate by segment or cohort, not only for the company.

Method 1: simple subscription LTV

LTV = (ARPA × Gross margin %) / Monthly churn rate

ARPA is average revenue per account per month.

Example: ARPA $30, gross margin 75 percent, monthly churn 5 percent.

• Monthly margin = 30 × 0.75 = $22.50
• LTV = 22.50 / 0.05 = $450
• Implied lifetime = 1 / 0.05 = 20 months

Use this when churn is stable and you have no cohort history. The formula assumes constant churn forever, which overstates value when early churn is high and later churn falls (the reverse can also happen).

Method 2: discounted LTV

LTV = Monthly margin / (Monthly churn + Monthly discount rate)

Using the same account and a monthly discount rate of 1 percent:

LTV = 22.50 / (0.05 + 0.01) = 22.50 / 0.06 = $375.

Discounting cuts the value by 16.7 percent (from 450 to 375). The effect is larger when churn is low, because the cash arrives further into the future. For a monthly churn of 1 percent and the same discount rate, undiscounted LTV is 22.50 / 0.01 = $2,250 and discounted LTV is 22.50 / 0.02 = $1,125, a 50 percent difference.

Method 3: repeat purchase LTV

LTV = Average order value × Contribution margin % × Orders per year × Expected years

Example: AOV $70, contribution margin 35 percent, 1.8 orders a year, expected customer life 2.5 years.

• Contribution per order = 70 × 0.35 = $24.50
• Annual contribution = 24.50 × 1.8 = $44.10
• LTV = 44.10 × 2.5 = $110.25

The weak input is usually expected years. If the business is under three years old, no customer has been observed for that long, so the number is an assumption. Cap it, or replace it with a cohort projection.

Method 4: cohort projection with a capped tail

A cohort of 500 customers produces the following contribution (illustrative):

First-year LTV per customer = 20,100 / 500 = $40.20.

Now project the tail. Suppose quarterly contribution has been declining and you assume it falls 15 percent per quarter after Q4. The projected quarters are:

Sum of Q5 to Q8 = $8,125.90. Two-year cohort contribution = 20,100 + 8,125.90 = $28,225.90. Two-year LTV = 28,225.90 / 500 = $56.45.

If you let the tail run forever at the same decline, the total tail is 2,550 / (1 - 0.85) = 2,550 / 0.15 = $17,000, and lifetime LTV = (20,100 + 17,000) / 500 = $74.20. The uncapped number is 31 percent higher than the two-year figure. The difference is the tail assumption, and it is a good reason to report both, and to base the CAC limit on the capped number.

Method 5: LTV with expansion

For subscriptions where accounts grow, net churn is churn less expansion.

LTV = Monthly margin per account / (Churn rate - Expansion rate)

Example: ARPA $500, gross margin 80 percent, so monthly margin is $400. Logo churn is 3 percent of MRR per month and expansion from existing accounts adds 1 percent of MRR per month. Net churn = 3% - 1% = 2%.

LTV = 400 / 0.02 = $20,000.

Compare with the no-expansion value: 400 / 0.03 = $13,333. Expansion adds 50 percent.

Two warnings. First, if expansion equals or exceeds churn, the formula gives infinity or a negative value, which signals that the model has broken, not that the customer is infinitely valuable. Cap the lifetime. Second, expansion usually comes from a subset of accounts, so apply it by segment. See expansion revenue and net revenue retention.

Choosing the method

Spreadsheet formulas

Monthly margin:            =ARPA*GrossMargin
Simple LTV:                =ARPA*GrossMargin/Churn
Discounted LTV:            =ARPA*GrossMargin/(Churn+DiscountRate)
Repeat purchase LTV:       =AOV*Margin*OrdersPerYear*Years
Tail (capped, n quarters): =LastQuarter*Decay*(1-Decay^n)/(1-Decay)
Expansion LTV:             =ARPA*GrossMargin/(Churn-Expansion)

For the capped tail, check the formula against the example: last quarter 3,000, decay 0.85, n = 4 gives 3,000 × 0.85 × (1 - 0.85^4) / 0.15. Since 0.85^4 = 0.5220, this is 2,550 × 0.4780 / 0.15 = 8,126, which matches the quarter-by-quarter sum.

Checks before you trust the number

1. Does LTV at 12 months, from the formula, roughly equal the observed 12-month cohort figure?
2. Is the margin the same one used in other reports?
3. Have returns, fees and shipping been included?
4. Is the lifetime longer than the oldest cohort? If so, label it a forecast.
5. Does the LTV differ by channel and segment in sensible ways?
6. Has the calculation been reviewed by someone outside the team that owns the metric?

Common pitfalls

• Revenue instead of contribution.
• Lifetime implied by churn that exceeds observed history.
• Mixing monthly churn with annual figures.
• Using average order value skewed by a few large buyers.
• Ignoring the cost of retention (loyalty rewards, customer success).
• Applying one churn rate to all segments.
• Never reconciling the model to cohort actuals.

Calculating LTV by segment

Overall LTV is the average of very different groups, so calculate it by segment before acting on it. Take two segments of a retailer, each using the repeat-purchase formula.

Segment A: average order value $80, contribution margin 40 percent, 2.0 orders a year and an expected life of 2 years. Contribution per order is 80 × 0.40 = $32, annual contribution is 32 × 2.0 = $64, and LTV is 64 × 2 = $128.

Segment B: average order value $55, contribution margin 30 percent, 1.2 orders a year and an expected life of 1.5 years. Contribution per order is 55 × 0.30 = $16.50, annual contribution is 16.50 × 1.2 = $19.80, and LTV is 19.80 × 1.5 = $29.70.

Segment A is worth 128 / 29.70 = 4.3 times as much as Segment B. A single blended LTV would have led to a single CAC limit, which would be too high for B and too low for A. Cut LTV by the dimensions that drive behavior, and set acquisition limits for each.

How often to recalculate

Recalculate LTV quarterly for the company and monthly for the segments that receive most of your acquisition spend. Recalculate immediately after a price change, a change in shipping policy, a new loyalty program or a major shift in channel mix, because each of these alters either contribution or retention. Keep a history of each calculation and the assumptions behind it, so that you can explain changes later.

FAQs

How do you calculate LTV?

For a subscription, divide monthly margin per account by monthly churn. For repeat purchase, multiply average order value, margin, orders per year and expected years. For best accuracy, sum observed cohort contribution and add a capped projection.

How do you calculate LTV with churn?

LTV equals monthly margin divided by monthly churn. A 5 percent monthly churn implies a 20-month lifetime.

How do you calculate LTV for ecommerce?

Use cohort data on repeat orders and contribution per order. If data are limited, use average order value × contribution margin × orders per year × expected years.

Should I discount LTV?

Yes, for long horizons or high discount rates. A simple form adds the monthly discount rate to churn in the denominator.

What is the difference between LTV and CLV?

None in practice. Customer lifetime value and customer lifetime value (CLV) are the same concept under different abbreviations.