CLTV Formula

What Is CLTV Formula? Meaning, Definition & Examples

Customer lifetime value (CLTV) is a business metric that estimates the total net revenue you can expect from a single customer over the entire duration of their relationship with your company. Instead of looking at one purchase or one billing cycle, CLTV considers every transaction, renewal, or subscription payment a customer will make before they eventually churn.

CLTV is usually expressed as an average per customer, based on either historical data from past customers or predictive models that forecast future behavior. You can calculate CLTV at different levels: for your whole customer base, for specific customer segments, or for acquisition cohorts to see how value changes over time.

Think of customer lifetime value like estimating the total rent paid by a tenant over all the years they stay in an apartment. A tenant who stays five years at $1,500 per month is worth far more than one who leaves after six months, even if the monthly rent is the same. The same logic applies to your customers: understanding how long they stay and what they spend during that time helps you make smarter decisions about acquiring customers and keeping them.

Why CLTV matters

CLTV connects revenue, costs, and customer retention into one strategic metric. Understanding why customer lifetime value important to your business helps you stop tracking these numbers separately and instead focus on a single figure that shows what a customer relationship is actually worth over time.

Here is why this matters in practice:

• Acquisition spending decisions: CLTV tells you how much you can afford to spend on customer acquisition without destroying profitability. If your average lifetime value is $600 and your customer acquisition cost is $200, you have room to grow. If those numbers flip, you are losing money on every new customer. Once you determine CLTV for your customer base, it tells you how much you can afford to spend on customer acquisition without destroying profitability.

• Retention and loyalty investments: When you know the lifetime value of keeping a customer longer, you can justify investments in customer loyalty programs, a referral program, better customer experience, or proactive customer success efforts. Generally speaking, reducing churn by even a small percentage can dramatically increase CLTV.

• Marketing budget and revenue forecasting: CLTV feeds directly into financial planning. It helps you forecast revenue from existing customers, plan marketing budgets, and evaluate unit economics at a company level.

• Investor and leadership confidence: Investors and leadership teams often look at the CLTV to CAC ratio to judge whether a growth model is sustainable. A ratio below 1:1 signals that acquisition costs exceed customer value, which is usually a red flag. A ratio of 3:1 or higher suggests a healthy, scalable business.

How CLTV works and main formulas used in CLTV calculations

There is no single universal CLTV formula. The right approach depends on your business model, available data, and how precise you need the calculation to be. Each CLTV formula calculates lifetime value slightly differently, but a few standard formulas cover most use cases.

Basic transactional CLTV formula

For ecommerce and transactional businesses, the most common formula is:

CLTV = average purchase value × average purchase frequency × average customer lifespan

Each input breaks down like this:

• Average purchase value: Total revenue divided by total number of orders over a time period

• Average purchase frequency: Total number of purchases divided by total number of customers

• Average customer lifespan: How long customers typically remain active, often calculated as 1 divided by churn rate

Subscription CLTV formula

For SaaS companies and subscription businesses, a common formula is:

CLTV = average revenue per user (ARPU) × gross margin × average customer lifetime

Here, average customer lifetime is typically expressed in billing periods (months or years), and gross margin accounts for the cost of delivering the service.

Net CLTV formula

More advanced formulas subtract customer acquisition cost and servicing costs to produce a net CLTV figure:

Net CLTV = (ARPU × gross margin × customer lifetime) − customer acquisition cost − total servicing costs

This version is useful for profitability analysis because it shows what you actually keep after covering all costs associated with a customer.

Step by step: how to calculate CLTV

Let us walk through a practical example using concrete numbers. This approach works for most digital businesses and can be adapted for your specific data.

Step 1: Calculate average purchase value

Start by dividing total revenue by the total number of orders in a given period.

Example: Your ecommerce store generated $50,000 in revenue from 1,000 orders in January 2025.

Average purchase value = $50,000 ÷ 1,000 = $50

Step 2: Calculate purchase frequency or ARPU

Divide the total number of purchases by the number of unique customers in the same period.

Example: Those 1,000 orders came from 400 unique customers.

Average purchase frequency = 1,000 ÷ 400 = 2.5 purchases per customer per month

Alternatively, for subscription models, calculate ARPU as total revenue divided by number of active subscribers.

Step 3: Estimate churn rate and customer lifetime

Customer churn rate is the percentage of customers lost in a given period. Average customer lifetime is calculated as 1 divided by churn rate.

Example: Your monthly customer churn rate is 5%.

Average customer lifetime = 1 ÷ 0.05 = 20 months

Step 4: Combine the numbers

Now apply the basic formula:

CLTV = average purchase value × purchase frequency × customer lifetime

CLTV = $50 × 2.5 × 20 = $2,500

This means each customer is worth an average of $2,500 over their relationship with your business.

Important note on time frames for CLTV calculations

Keep all inputs in the same time frame. If you calculate monthly churn, use monthly ARPU. If you calculate annual churn, use annual revenue figures. Mixing monthly and yearly data will produce meaningless results.

Customer lifetime value formula examples

This section shows several concrete CLTV examples for different business models, so you can see how the formulas work in practice.

Example 1: Subscription SaaS company

A SaaS company has the following data:

• Monthly ARPU: $200

• Gross margin: 80%

• Monthly churn rate: 2.5%

First, calculate customer lifetime: 1 ÷ 0.025 = 40 months

Then calculate gross profit contribution: $200 × 0.80 = $160 per month

CLTV = $160 × 40 = $6,400

Interpretation: Each customer generates approximately $6,400 in gross profit over their average lifetime with the company.

Example 2: Ecommerce store

An online retailer tracks these metrics:

• Average order value: $100

• Purchase frequency: 3 orders per year

• Average customer lifespan: 4 years

CLTV = $100 × 3 × 4 = $1,200

Interpretation: The average customer spends $1,200 over four years, which helps the retailer decide how much to invest in acquiring new customers and retaining loyal customers.

Example 3: Net CLTV with costs factored in

A subscription service wants to understand true profitability:

• Monthly ARPU: $50

• Gross margin: 75% (contribution = $37.50)

• Monthly churn rate: 4% (lifetime = 25 months)

• Customer acquisition cost: $800

• Total servicing costs over lifetime: $200

Gross CLTV = $37.50 × 25 = $937.50

Net CLTV = $937.50 − $800 − $200 = −$62.50

Interpretation: This customer segment is actually unprofitable. The company needs to reduce acquisition costs, lower servicing expenses, or improve retention before this segment makes money.

Best practices for using CLTV

CLTV is only as good as the assumptions and data behind it. Here are practical guidelines for getting reliable, actionable results.

Start simple, then add complexity

Begin with the basic formula using average value, frequency, and lifespan. Add gross margin, discount rates, or cohort analysis only when your data quality supports it. Overcomplicating early leads to false precision.

Segment your CLTV calculations

A single blended CLTV average number hides important differences. Segment by:

• Customer type (enterprise vs. SMB)

• Acquisition channel (organic vs. paid)

• Geography or product line

This reveals which segments drive the most value and where you should focus resources.

Recalculate regularly

CLTV should be a living metric. Recalculate at least quarterly to capture changes in retention, pricing, or product mix. After major events like a pricing change or product launch, recalculate immediately.

Do not use CLTV to justify unlimited spending

A high CLTV does not mean you can spend freely on acquisition. Always check:

• Cash flow constraints (can you afford to wait for payback?)

• Payback period (how long until acquisition cost is recovered?)

• Risk factors (what if churn increases unexpectedly?)

Key metrics related to CLTV

CLTV depends on several input metrics that should be tracked consistently. Here are the most important ones:

The CLTV to CAC ratio is particularly important. Many SaaS businesses and ecommerce companies target a ratio of at least 3:1, meaning the lifetime value of a customer should be three times the cost to acquire them. Below that, growth becomes expensive and risky.

CLTV and related concepts

CLTV connects to a broader set of analytics and customer strategy concepts. Understanding these relationships helps you use CLTV more effectively.

CLTV vs. LTV

In practice, customer lifetime value (CLTV) and LTV usually mean the same thing. Some organizations use LTV for lifetime value without the customer prefix, but the calculation and purpose are identical. The term combined loan to value (CLTV) has a completely different meaning in mortgage lending, where it refers to the loan amount relative to property value for borrowers with secured loans like a first mortgage or second mortgage. In a marketing or SaaS context, CLTV always refers to customer lifetime value.

Cohort analysis and churn modeling

CLTV depends on accurate lifetime estimates, which come from cohort analysis and churn modeling. By tracking how different customer cohorts behave over time, you can spot trends in retention and adjust CLTV projections accordingly.

Complementary metrics

CLTV works alongside other factors like average basket size, repeat purchase rate, and payback period. These metrics provide granular insights that feed into and explain changes in CLTV.

Testing and optimization

CLTV is often used together with A/B testing, pricing experiments, and personalization initiatives. When you test a new retention tactic or pricing model, measuring the impact on CLTV tells you whether the change drove long term revenue impact or just short term noise.

Key takeaways

• CLTV (customer lifetime value) estimates the total net revenue a single customer generates over the entire relationship with your business.

• The core CLTV formula is: CLTV = average revenue per customer × gross margin × average customer lifetime (minus acquisition and service costs for net CLTV).

• Different CLTV formulas exist for transactional, subscription, and advanced financial modeling use cases.

• CLTV guides decisions on acquisition budget, retention strategy, and product or pricing optimization.

• A healthy CLTV to CAC ratio of at least 3:1 is the benchmark most SaaS businesses and ecommerce companies target.

FAQ about CLTV Formula