How to calculate customer lifetime value
Customer lifetime value (CLV) is the total a typical customer is worth to your store over the time they keep buying. On a profit basis, it's lifetime revenue multiplied by your contribution margin. It sets the ceiling on what you can pay to acquire a customer and still come out ahead.
The calculator uses two formulas:
Lifetime revenue = average order value × orders per year × years as a customer
Customer lifetime value (profit) = lifetime revenue × contribution margin
- Average order value is revenue divided by orders, from your Shopify analytics.
- Orders per customer per year is how often a typical customer buys in a 12-month period.
- Customer lifespan is how many years a customer keeps ordering before they stop.
- Contribution margin is the share of each order left after product cost, shipping, payment fees and discounts. The contribution margin calculator works it out.
- Customer acquisition cost (CAC) is what you spend in marketing to win one new customer. It's optional, and the calculator needs it to show the ratio.
Worked example
These are the calculator's default inputs.
| Input or result | Value |
|---|---|
| Average order value | $60 |
| Orders per customer per year | 2 |
| Customer lifespan | 2 years |
| Contribution margin | 45% |
| Customer acquisition cost | $40 |
| Lifetime revenue | $240 ($60 × 2 × 2) |
| Customer lifetime value (profit) | $108 ($240 × 45%) |
| CLV to CAC ratio | 2.7x ($108 ÷ $40) |
The customer spends $240 with you. After the cost of fulfilling those four orders, $108 is left. You paid $40 to win them, so they return 2.7 times their acquisition cost over two years.
Revenue CLV vs profit CLV
Revenue CLV and profit CLV can differ by more than half, and only one of them belongs next to your ad budget. Revenue CLV is the $240 in the example. Profit CLV is the $108. The difference is everything it costs to make and deliver the orders.
Why does this matter? Because CAC is paid in real money. If you compare a $40 acquisition cost with $240 of revenue, the ratio looks like 6x. Against the $108 the customer actually contributes, it's 2.7x. Teams that set budgets on revenue CLV routinely overpay for customers without noticing until cash gets tight.
There's a second gap: timing. The $108 arrives over two years. The $40 leaves on day one. So two stores with the same ratio can feel very different if one gets its money back in the first order and the other waits a year.
How to read your result
Read the ratio against your own cash and payback, not against a figure from someone else's business. Many teams set a target CLV to CAC ratio. The right target for you depends on how much cash you can tie up and how long you can wait for it to come back.
Decision rules from your own numbers:
- Ratio below 1.0 (profit basis): customers never pay back what you spent on them. Cut acquisition cost or raise lifetime value before scaling spend.
- Ratio above 1.0, but first-order contribution is below CAC: you're profitable over the lifetime and cash-negative at the start. Check how many months payback takes, and whether you can fund that gap.
- Ratio comfortably above 1.0 with quick payback: you can likely afford to pay more per customer. Test higher acquisition budgets while watching the ratio.
Your profit CLV is also the most you could ever pay per customer and break even. Your target CAC should sit well below it.
What moves customer lifetime value
Each input is a lever, and each one maps to different work.
- Average order value. A bigger basket lifts every future order too. Our Invisible Second Sale service is built around this.
- Purchase frequency. Replenishment reminders, post-purchase email and products that get used up all raise orders per year. Our guide to repeat purchase rate covers how to measure it.
- Lifespan. Keeping customers longer is a retention job. Track it with the customer retention rate calculator.
- Contribution margin. Lower fulfilment cost and fewer blanket discounts raise profit CLV without changing customer behaviour.
- Acquisition cost. A better-converting store lowers CAC on the same ad spend. A teardown shows where buyers drop off.
For more depth on how CLV fits a growth plan, read customer lifetime value in ecommerce.
Common mistakes
- Using revenue CLV against CAC. It inflates the ratio and justifies spend that doesn't pay back.
- Guessing the lifespan. An optimistic lifespan multiplies straight into the answer. Base it on how long past cohorts actually kept buying.
- Mixing all customers together. One-time discount buyers and loyal subscribers average into a number that fits neither. Split by channel or first product if you can.
- Ignoring timing. A good lifetime ratio can still strain cash if payback takes a year.
- Blending CAC across channels. A cheap organic customer hides an expensive paid one. Calculate CAC per channel where the data allows.
If your lifetime value and acquisition cost don't line up, a game plan shows which lever to pull first.