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What is customer lifetime value and how do I calculate it simply?
Customer lifetime value (CLV) is the total gross profit you expect from a customer over the whole relationship. A simple version multiplies average order value by gross margin percentage, by orders per year, by expected years as a customer.
Example with currency units: an average order of 50, a 40 percent margin, three orders per year and two years gives 50 x 0.40 x 3 x 2 = 120.
It matters because it sets how much you can sensibly spend to acquire a customer.
Commonly misread:
- Using revenue instead of margin, which overstates value.
- Using averages across all customers when a few repeat buyers drive most of the value.
- Projecting years of life from only a few months of data.
Where possible, calculate it from actual historical cohorts rather than assumptions, and label clearly whether it is historical or predicted.
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