Ways to calculate customer lifetime value that the business should know

Customer lifetime value is vital to a business because it helps determine how profitable the company will be. However, the “customer lifetime value formula” is still not fully understood for many businesses. This article will explain more clearly how to calculate customer lifetime value that companies can immediately apply.

What is customer lifetime value?

Customer Lifetime Value (CLV) is understood as the value a customer contributes to a company during the purchase process. CLV is a measure of how profitable that customer is for the business in an unlimited period of time. It means that loyal customers are the ones who bring long-term and sustainable profits to the business because they have a high lifetime value. 

Why should businesses care about customer lifetime value?

Understanding the long-term value of customers, businesses can devise strategies to find new customers, retain existing customers and balance profit margins. Companies do not have to spend too much money to find new customers if they can keep their old customers. So, focusing on increasing the value of existing customers is an excellent way to drive growth. However, long-term retention of old customers is not always the chosen strategy. In case if the cost of providing services to existing customers becomes too high even though the value they bring is great, the business may also suffer a loss.

Customer lifetime value divides into two categories:

  • Historical Customer Lifetime Value: the total return of all historical purchases.
  • Predictive Customer Lifetime Value: a predictive analysis based on previous historical purchase data and customer behaviours. This indicator depends on technical analysis for a level of accuracy, applicable to any purchase.

How to calculate customer lifetime value?

It is not a simple task for businesses to determine customer lifetime value because it depends heavily on the data provided. There are 2 most common methods of calculating CLV that businesses can use depending on their actual situation.

Method 1: Based on historical purchase

If the business has a sales data history, this method is much more accurate. It aggregates all orders of each customer to get their own real CLV. In cases where a business has been around for a while and just decided to start tracking customer lifetime value, some e-commerce analytics tools can assist in getting this data back from the beginning. The formula will be as follows:

CLV = (Order 1 + Order 2 + …… + Order n)* AGM

Note: AGM is the Average Gross Margin

Method 2: Predict the lifetime value

If businesses don’t have detailed data, they can estimate the average using the following formula:



  • T: Average number of monthly orders
  • AOV: Average Order Value 
  • ACL: Average Customer Lifespan – Average shopping time of all customers from the first order to the last order

This method estimates if a business is launching its e-commerce store.

So, based on the actual situation, businesses can choose the most suitable CLV formula. Businesses with high CLVs can grow more independent of advertising costs and enjoy steady cash flow. Hopefully this helpful information will help businesses in the development process.

IMP provides digital marketing services for global ecommerce companies. Our solutions help businesses increase their profits sustainably and reduce dependency on paid media.