Customer lifetime value formula
The simplest CLV is gross profit per period divided by the churn rate per period, because 1 ÷ churn is the expected number of periods a customer stays. With $50 a month at 80% margin and 4% churn: $40 ÷ 0.04 = $1,000.
Gupta and Lehmann’s widely used version adds a discount rate, because a dollar of margin in year five is worth less than one today. For a constant annual margin m, retention rate r and discount rate i, lifetime value is m × r ÷ (1 + i − r).[1][2]
That example is from their book: with Ameritrade’s roughly 95% retention and a 12% discount rate, the margin multiple is 5.59 and the customer is worth about $1,126, against an acquisition cost of about $203.[1] The calculator reproduces those figures with the “Ameritrade” preset.
Margin multiple table
The fraction r ÷ (1 + i − r) is a “margin multiple”: how many years of margin a customer is worth today.
| Retention | 8% | 10% | 12% | 15% |
|---|---|---|---|---|
| 60% | 1.25 | 1.2 | 1.15 | 1.09 |
| 70% | 1.84 | 1.75 | 1.67 | 1.56 |
| 80% | 2.86 | 2.67 | 2.5 | 2.29 |
| 90% | 5 | 4.5 | 4.09 | 3.6 |
| 95% | 7.31 | 6.33 | 5.59 | 4.75 |
Retention moves the multiple far more than the discount rate does: going from 80% to 90% retention roughly doubles customer value. Measure retention with the customer retention rate and churn with the churn rate calculator. Total customer lifetime value across all customers is what marketing textbooks call customer equity.[3]
LTV:CAC ratio
The LTV:CAC ratio divides lifetime value by customer acquisition cost; above 1 the average customer pays back more than they cost. There is no primary-source “correct” ratio, and companies that publish CAC define it differently,[4] so compare your ratio over time and between channels rather than against a rule of thumb. Get CAC from the CAC calculator.
CLV mistakes
- Using revenue instead of margin. A customer who spends $1,000 at a 30% margin is worth $300 to cover acquisition, not $1,000.
- Annual churn in a monthly formula. Mixing periods inflates lifetime twelvefold. Keep revenue and churn on the same period.
- Averaging away cohorts. Customers acquired by discounts often churn faster; compute CLV by channel or cohort.
Frequently asked questions
How do you calculate customer lifetime value?
For subscriptions: monthly revenue × gross margin ÷ monthly churn. $50 × 80% ÷ 4% = $1,000.
What is the CLV formula with a discount rate?
CLV = m × r ÷ (1 + i − r), where m is annual margin, r annual retention and i the discount rate (Gupta and Lehmann).
How do I calculate LTV to CAC ratio?
Divide lifetime value by customer acquisition cost. $1,000 ÷ $250 = 4:1.
Is LTV the same as CLV?
Yes in marketing: both mean customer lifetime value. In lending, LTV means loan-to-value, which is unrelated.
Sources
- Managing Customers as Investments: The Strategic Value of Customers in the Long Run (Gupta and Lehmann), sample chapters
- Valuing Customers (Gupta, Lehmann and Stuart), Journal of Marketing Research, author manuscript
- Principles of Marketing, 1.6 Customer Relationship Management (CRM)
- FIGS, Inc. Form 10-K for 2021 (definition of customer acquisition cost)