How to estimate customer lifetime value
Combine margin, retention and acquisition cost.
Enter monthly revenue
Use average revenue per account, not your largest customer.
Add gross margin
Margin should reflect delivery costs, not just revenue.
Use churn to size lifetime
Lifetime is approximately 1 divided by the monthly churn rate.
What does this tool do?
Lifetime value converts recurring revenue and retention into the gross profit expected from a customer. It is most useful next to acquisition cost, because the LTV to CAC ratio shows whether growth spending pays back.
The Formula
CLV = Monthly revenue per customer × Gross margin % × (1 ÷ Monthly churn rate)Frequently Asked Questions
Should CLV use revenue or gross profit?
Gross profit is the safer basis because serving a customer has costs. Revenue-based LTV overstates value, especially for low-margin products.
How do I interpret the LTV to CAC ratio?
A ratio of roughly 3 to 1 is a common rule of thumb, but it varies by industry and payback period. Below 1 means acquisition destroys value at current retention and margin.