Customer Lifetime Value Calculator

How to use it

1. Enter your average order value and how many orders a customer places in a year.
2. Enter how many years a customer keeps buying and your gross margin.
3. Keep the ratio at 3 or set your own: the tool shows the most you can pay to win one customer.

The formula

Lifetime revenue = average order value × orders per year × years as a customer. Lifetime value = lifetime revenue × gross margin. Most to pay per new customer = lifetime value ÷ your target ratio.

A worked example

A customer who spends $60 an order, 2.5 times a year, for 3 years brings in $450. At a 40% gross margin that is $180 of profit. With a 3 to 1 ratio, you can pay up to $60 to win that customer.

Why 3 to 1

Lifetime value is a forecast, and the cost to win a customer is paid up front. Spending a third of what a customer is worth leaves room for forecasts that come in low, for fixed costs and for profit. Fast-growing brands sometimes accept 2 to 1; careful ones aim for 4 or more.

Finding your own numbers

Average order value is revenue ÷ orders. Orders per year is orders ÷ unique customers over a year. Years as a customer is harder: start with how long your repeat buyers keep ordering, and use a short figure if your store is new.

Use margin, not revenue

Some calculators stop at lifetime revenue. That number is far too high to set an ad budget on: you have to pay for the products and shipping out of it. Gross margin turns revenue into the profit you can actually spend to win customers.

Questions

What is a good LTV for ecommerce?

One that is clearly higher than what you pay to win a customer. The ratio matters more than the number: a $100 LTV is great if a customer costs $25, and a problem if they cost $90.

How do I raise customer lifetime value?

Sell more per order (bundles, upsells), bring customers back more often (email and SMS flows, subscriptions) and keep them longer (product quality and service). Each one raises a different part of the formula.

Should gross margin include shipping?

Yes, if you pay for shipping. Gross margin here means what is left of the order after product and shipping costs, before ads.

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