How to Calculate Customer Lifetime Value (CLV / LTV)

Customer Lifetime Value (CLV or LTV) measures the total value a customer generates over their entire relationship with your business. It's one of the most important metrics for understanding customer economics, guiding acquisition spending, and predicting business health.

CLV answers the question: How much is a customer worth?

Basic CLV Formula

The simplest CLV formula:

CLV = Average Revenue per Customer × Average Customer Lifespan

For subscription businesses:

CLV = ARPU × Average Customer Lifetime (months)

Where:

• ARPU = Average Revenue Per User (monthly)
• Customer Lifetime = 1 / Churn Rate

Detailed Calculation Methods

Method 1: Historical CLV

Calculate actual value from customer data:

Historical CLV = Total Revenue from Customer since Acquisition

Pros: Accurate for existing customers Cons: Doesn't predict future value; requires mature customer base

Method 2: Predictive CLV (Simple)

Project future value using averages:

Predictive CLV = (ARPU × Gross Margin %) × (1 / Monthly Churn Rate)

Example:

• ARPU: $100/month
• Gross Margin: 70%
• Monthly Churn: 2%

CLV = ($100 × 0.70) × (1 / 0.02) = $70 × 50 = $3,500

Method 3: Cohort-Based CLV

Calculate CLV for groups of customers acquired together:

1. Group customers by acquisition month
2. Track cumulative revenue per cohort over time
3. Project future revenue based on cohort patterns
4. Average across cohorts for overall CLV

Pros: Accounts for changing customer behavior over time Cons: Requires sufficient cohort history

Method 4: Discounted CLV

Accounts for time value of money:

CLV = Σ (Revenue_t × Margin) / (1 + Discount Rate)^t

Sum over expected lifetime, discounting future revenue.

Pros: More financially accurate Cons: More complex; requires discount rate assumption

CLV by Segment

Aggregate CLV hides important variation. Calculate by segment:

Segment	ARPU	Avg Lifetime	CLV
Enterprise	$500	36 months	$18,000
Mid-Market	$150	24 months	$3,600
SMB	$50	12 months	$600

Segment-level CLV informs targeting and resource allocation.

CLV:CAC Ratio

CLV alone isn't enough - compare to Customer Acquisition Cost:

CLV:CAC Ratio = CLV / CAC

Ratio	Interpretation
< 1:1	Losing money on customers
1-2:1	Marginal; limited growth investment capacity
3:1	Healthy; standard SaaS target
> 5:1	Very healthy (or underinvesting in growth)

Common CLV Mistakes

Mistake 1: Ignoring Churn Variability

Using average churn when different segments churn differently produces misleading CLV.

Mistake 2: Revenue vs. Margin Confusion

Revenue-based and margin-based CLV serve different purposes. Don't mix them or compare them directly.

Mistake 3: Acquisition Cohort Bias

Recent customers haven't had time to generate full lifetime value. Don't compare raw historical CLV across cohorts of different ages.

Mistake 4: Static Assumptions

CLV inputs change over time. Using outdated churn rates or ARPU produces stale CLV estimates.

Mistake 5: Ignoring Expansion

For businesses with significant expansion revenue, CLV should include upgrades and cross-sells, not just initial contract value.

CLV in Context-Aware Analytics

metric:
  name: Customer Lifetime Value
  description: Predicted total value per customer
  formula: |
    (monthly_arpu * gross_margin_pct) / monthly_churn_rate
  variations:
    - name: CLV-Revenue
      description: Revenue-based, excludes margin
      formula: monthly_arpu / monthly_churn_rate
    - name: CLV-Historical
      description: Actual realized value
      formula: sum(customer_revenue) since acquisition
  dimensions: [customer_segment, acquisition_channel, product]
  refresh: monthly
  owner: finance_team

With governed definitions, CLV means the same thing in every report and analysis.