Customer Lifetime Value: Formula and How to Estimate It
By Alva Chew · Updated
Definition Customer lifetime value is the total gross profit you expect from an average customer over the whole time they keep buying from you. A simple estimate is average spend per visit times visits per year times gross margin times years as a customer. A café customer who spends US$6 twice a week at a 70% margin for 2 years is worth about US$874.
What is customer lifetime value?
Customer lifetime value is the gross profit an average customer brings you from their first purchase to their last. It is often shortened to CLV or LTV. For a café, restaurant or shop, it answers a plain question: what is a regular worth to me over the years they keep coming?
The number helps you decide how much effort a new customer deserves and how much a lost regular costs you.
How do you calculate customer lifetime value?
Formula: average spend per visit × visits per year × gross margin × years as a customer.
| Item | Illustrative number |
|---|---|
| Average spend per visit | US$6.00 |
| Visits per year (twice a week) | 104 |
| Revenue per customer per year | US$624 |
| Gross margin | 70% |
| Gross profit per customer per year | US$436.80 |
| Average years as a customer | 2 |
| Customer lifetime value | US$873.60 |
These numbers are made up to show the arithmetic. Replace each line with your own till and member data.
How do you estimate how long a customer stays?
Take your yearly churn rate, the share of customers who stop buying in a year, and divide 1 by it. In a made-up example where 40% stop each year, the average customer stays 1 ÷ 0.40 = 2.5 years. If only 20% stop, the average is 5 years.
Your customer retention rate is the other side of this. In the same made-up example, retention of 60% means churn of 40%. Small changes matter a lot here, because churn sits under the whole calculation.
Why use gross profit and not revenue?
Revenue ignores what each sale costs you. In a made-up example, a US$6 coffee that costs US$1.80 to make leaves US$4.20, which is a 70% margin. Using revenue would make every customer look 43% more valuable than they are.
Gross profit also lets you compare lifetime value with what you spend to win a customer, such as a discount offer or an advert. If a customer is worth US$873.60 in gross profit and costs US$15 to win, the maths is comfortable. If the two numbers are close, it is not.
How does it relate to repeat purchase rate?
Repeat purchase rate tells you how many customers come back at all. Lifetime value adds how often they come, how much they spend and how long they stay. A low repeat rate pulls down the visits and years in your formula, so improving it is one of the ways to lift the result.
How can a points program help you track it?
A till records sales, not people. To follow one customer across visits you need an identifier that stays with them. A loyalty program member account supplies that, so each purchase is tied to a person and you can see spend and visit frequency per member.
A points-based loyalty program gives members a balance that grows with each purchase, which gives them a reason to return. Whether that raises lifetime value for your shop is something to test. Compare members before and after they joined. The figures cover members only, so say so when you report them.
What are the limits of the estimate?
The formula uses averages. A few heavy buyers can lift the average while most customers are worth far less, so look at the spread as well. Customers who joined recently have not yet shown how long they will stay, so the years figure is a guess for them. Review the number every quarter and keep your method the same, so changes reflect your business and not the arithmetic.
Tracking it with Gimify
Gimify keeps one points balance per member across every outlet, so a member who visits a second branch stays one person in your records. The free plan covers one outlet with unlimited members, and the card lives in Google Wallet with no app to download.
Questions owners ask
How do I calculate customer lifetime value?
Multiply average spend per visit by visits per year, then by your gross margin, then by the number of years a customer typically keeps buying. With US$6 a visit, 104 visits a year, a 70% margin and 2 years, the value is 6 x 104 x 0.70 x 2 = US$873.60.
Should I use revenue or profit?
Use gross profit. Revenue overstates what a customer is worth because it ignores the cost of the coffee, the meal or the product. Multiplying by your gross margin gives a figure you can compare with what you spend to win a customer.
How do I work out how long a customer stays?
Divide 1 by your annual churn rate. If 40% of customers stop buying each year, the average life is 1 / 0.40 = 2.5 years. Your customer retention rate gives you the other side of the same number.
What is a good customer lifetime value?
There is no single good number, because spend and visit frequency differ by business. Track your own figure over several periods and judge changes against that baseline. Compare it with what it costs you to win a customer.
Can I measure it without a loyalty program?
Only roughly. A till records sales, not people, so you cannot follow one customer across visits. A loyalty program member account ties each purchase to a person, which lets you measure spend and visit frequency per member.
Does a points program raise customer lifetime value?
Test it instead of assuming it. Compare members before and after they joined, and compare new members with the period before you launched. Members may already be your keenest customers, so a member against non-member comparison alone can mislead.
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