To calculate customer lifetime value (CLV), multiply average order value by the number of orders a customer places per year and by the number of years they keep buying, then multiply by your gross margin to get profit. Example: a $40 average order × 2.5 orders a year × 2 years = $200 in revenue per customer; at a 45% gross margin, CLV = $90 in profit. That $90 is the most you could spend to win a customer and still break even.
CLV (also written LTV) answers one question for a small shop: how much is a new customer worth? Without it, you can't tell whether a $30 customer acquisition cost is cheap or ruinous. This guide gives three formulas, from a quick estimate to a cohort method that uses your real order history, with worked examples, and shows how to compare CLV with what you spend on ads.
- Revenue CLV = average order value × orders per year × years as a customer.
- Profit CLV = revenue CLV × gross margin. Use this one for ad decisions.
- Churn method: CLV = (AOV × orders per year × margin) ÷ annual churn rate.
- Cohort method: add up what one month's new customers actually spent over the following 12 months, divided by how many there were.
- Compare with CAC: profit CLV must be higher than customer acquisition cost, with room for overheads.
What is the customer lifetime value formula?
The basic formula is:
CLV = average order value × purchase frequency × customer lifespan × gross margin
| Input | How to get it | Example |
|---|---|---|
| Average order value (AOV) | Revenue ÷ number of orders, last 12 months | $48,000 ÷ 1,200 = $40 |
| Purchase frequency | Orders ÷ unique customers, last 12 months | 1,200 ÷ 480 = 2.5 a year |
| Customer lifespan | Average years a customer keeps buying (or 1 ÷ churn rate) | 2 years |
| Gross margin | (Revenue − cost of goods, fees, shipping) ÷ revenue | 45% |
| Profit CLV | $40 × 2.5 × 2 × 0.45 | $90 |
Leave out the margin and you get revenue CLV ($200 here). It's useful for forecasting sales, but comparing it with ad spend overstates what you can afford, because most of that $200 pays for the product. Work out margin with the free profit margin calculator or our guide on how to calculate profit margin.
How do you calculate CLV step by step?
- Export 12 months of orders from Shopify, Etsy, WooCommerce or your marketplace, with customer email or ID, date and order total.
- Average order value: total revenue ÷ number of orders.
- Purchase frequency: number of orders ÷ number of unique customers.
- Lifespan: estimate how many years customers keep buying. If you don't know, use 1 ÷ churn rate (below), or start with 1 year to stay conservative.
- Gross margin: after product cost, packaging, payment and marketplace fees, and any shipping you pay.
- Multiply them for profit CLV.
With under a year of data you can't see lifespan yet. Use one year, or only the first order's profit, until you have enough repeat orders to measure. Overestimating CLV is how small shops talk themselves into unprofitable ads.
How do you calculate CLV with churn rate?
If you know what share of customers stop buying each year, use:
CLV = (AOV × orders per year × gross margin) ÷ annual churn rate
Churn rate is the share of last year's customers who didn't buy again this year. If 60% didn't return, churn is 0.6 and the average lifespan is 1 ÷ 0.6 ≈ 1.7 years. With the numbers above: ($40 × 2.5 × 0.45) ÷ 0.6 = $45 ÷ 0.6 = $75 profit CLV.
This version suits subscription boxes and consumables, where customers either keep reordering or stop. For gift and one-off products, churn is high and CLV is close to the first order's profit.
What is the cohort method, and why is it more accurate?
Instead of averages, follow real customers. Take everyone who made a first purchase in one month (a cohort), add up the gross profit from every order they placed in the next 12 months, and divide by the number of customers.
| Cohort: first order in January | Value |
|---|---|
| New customers | 120 |
| Orders in the next 12 months (including the first) | 264 |
| Revenue from those orders | $10,560 |
| Gross profit at 45% | $4,752 |
| 12-month profit CLV | $4,752 ÷ 120 = $39.60 |
Repeat this for a few cohorts and you'll see whether customers from a sale, a marketplace or an ad campaign are worth more or less than others. It's the number to trust once you have a year of data, because it uses what customers actually did rather than an assumed lifespan.
How do you compare CLV with customer acquisition cost?
Customer acquisition cost (CAC) is what you spend to win one new customer. As long as profit CLV is above CAC, a new customer eventually pays for themselves; the gap is what's left for rent, tools and your own pay. Ratios such as 3:1 come from subscription software and are a rough guide at best for a product shop; what matters is the gap in dollars and how long it takes to earn back the CAC.
| Profit CLV | CAC | What it means |
|---|---|---|
| $90 | $30 | Healthy: $60 left per customer; paid back on the first one or two orders |
| $90 | $80 | Thin: almost all profit goes to ads; one bad month makes it negative |
| $40 | $45 | Losing money on every new customer |
See how to calculate customer acquisition cost for the other side of the comparison, and break-even ROAS to turn a target CAC into a return on ad spend. The free ROAS calculator does the arithmetic.
How can a small shop increase customer lifetime value?
- Raise average order value with bundles, a free-shipping threshold and add-ons; see how to increase average order value.
- Make reordering easy: a reminder email when a consumable runs out, or a subscribe option.
- Improve the unboxing so buyers remember you; see how to create an unboxing experience.
- Cut returns with accurate photos and size details, since a return wipes out an order's profit.
- Protect margin rather than discounting to win repeat orders.
All the money guides are collected in the selling online hub.
Frequently asked questions
What is the difference between CLV and LTV?
Nothing practical: both mean customer lifetime value. Some teams use LTV for revenue and CLV for profit, so say which one you mean.
What is a good customer lifetime value?
There's no universal number. A good CLV is one comfortably above your customer acquisition cost after margin, so each new customer pays back what it cost to win them.
Should CLV use revenue or profit?
Profit, for any decision about ad spend or discounts. Revenue CLV is fine for sales forecasting.
How do I calculate CLV in Shopify or Excel?
Export 12 months of orders with customer IDs, then compute total revenue, order count and unique customers. AOV = revenue ÷ orders, frequency = orders ÷ customers, then multiply by lifespan and margin.
How often should I recalculate CLV?
Every quarter, or after a big change in pricing, products or marketing channels.
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