How we calculate CLV
CLV estimates the profit an average customer generates while they keep buying. We use the simple margin-based model, with no financial discounting.
Use the CLV CalculatorFormula
CLV = average order value × purchases per year × retention years × margin
Variables
- average order value
- Average value of each purchase.
- frequency
- Number of purchases per year, converted from the chosen periodicity.
- time
- Years the customer stays active on average.
- margin
- Profit margin applied to the revenue generated.
Step-by-step calculation
- We convert the chosen frequency into purchases per year.
- We multiply order value, frequency, and time to get the customer's total revenue.
- We apply the margin to arrive at the estimated profit.
Worked example
Inputs
- Order value: $80
- Monthly (12×/year)
- Retention: 2 years
- Margin: 40%
Calculation
revenue = 80 × 12 × 2 = 1,920
1,920 × 0.40
CLV of $768 in profit per customer.
Common mistakes
- Using gross margin when the decision requires net margin.
- Overestimating retention based on a handful of long-time customers.
Frequently asked questions
Does the model account for the time value of money?
No. For long horizons, apply a discount rate to the result.
All values are in US dollars (US$). Results are estimates and do not replace professional advice.