Understanding CLTV: Calculating how much a customer is really worth

Let’s be honest - when most businesses talk about Customer Lifetime Value (CLTV), what they really mean is often just a rough guess. A number plucked out of thin air, padded with optimism, and held up in pitch decks as if it's set in stone (news flash, it's a number that changes…a lot).

And who can really blame them? If you’re a new startup, or you’ve not started to track retention properly, working out how much a customer is worth over their entire relationship with your business probably feels like a shot in the dark.

But here’s the good news…CLTV doesn’t have to be finger in the air guesswork forever.

Sure, it starts with some assumptions. Yes you’ll probably be basing it off limited data initially. But with the right approach, those guesses can quickly become grounded in reality and eventually give a clear, confident view of how valuable each customer really is.

Here's what's ahead in this article:

Let’s demystify this metric, one piece at a time 💪

What is CLTV really?

Customer Lifetime Value (CLTV) is the total revenue you expect to earn from a single customer over the full course of their relationship with your business.

Sounds fairly straightforward, right?

Well, the tricky part is that relationships aren’t set in stone - customers come and go, some churning after their first order, whilst others become loyal super fans that stick around for years.

Let’s face it, in the early days of business, you’re not likely to have enough long-term data to know which customer is which.

That’s why CLTV often starts out as a best guess scenario - a working theory based on current averages, assumptions and early patterns (like your existing churn rate and average order value, also known as AOV).

And that’s absolutely fine. Because even a directional CLTV can unlock smarter marketing and tighter budgeting if you treat it like a living, constantly evolving metric.

It’s not always about perfection. It’s about direction.

How do you actually calculate CLTV?

There’s a few ways you can approach CLTV, some simple, others more complex. The key is to start with the data you already have and build from there.

The basic CLTV formula

The OG starting formula looks like this:

CLTV = Avg order value x Avg number of purchases per customer

Let’s break it down to paint a clearer picture:

• Average order value: What does your typical customer spend, on average, per order?
• Average number of purchases per customer: How many times does a customer typically buy before they ghost you?

Let’s say your average customer spends $50 per order and buys 8 times:

CLTV = $50 × 8 = $400

That’s your revenue-based CLTV 👆

But revenue doesn’t pay the bills, profit does. So you can get a more useful number by factoring in gross margin like this to get your profit-based CLTV 👇

CLTV = (Average order value × Gross margin) × Average number of purchases

Let's say you’re running at a 60% margin, that $400 CLTV suddenly becomes a tidy $240 in profit, which is a very different story.

What if you don’t have enough data yet?

This is the sticking point many businesses find themselves at 🤔

You want to use CLTV to help guide your ad budget or retention strategy (your plan to keep existing customers engaged, satisfied, and coming back for more), but you don’t have months (or even years) worth of data to help you calculate your customer lifespan or their repeat purchase frequency.

Here’s how you can make smart estimates:

1. Use your churn rate to estimate lifespan: If you’re a subscription based business and you know your monthly churn is 25% of users, that means on average customers stick around for about 4 months (Lifespan = 1 / churn rate). Easy right?
2. Lean on early established cohorts: Look at your very first customers. How often are they still buying? Are they even still buying? Even a few months worth of trend data can help you reveal a lot.
3. Borrow data from similar products: If you’re running a second product, brand or have a sister company, you might be able to use that historical data as a proxy (at least until you build your own data set).
4. Use industry benchmarks: You’ll be able to find plenty of online articles and resources telling you the “average CLTV for SaaS, eCommerce or B2B”. You could use that data to help you set a CLTV range. It's worth remembering that borrowed data comes with its caveats, so use it as a range, not a rule.

🔥Top tip: It’s a good idea to model out conservative, realistic and optimistic CLTV scenarios. Having a scale to work with can help you move the needle, just make sure your ad spending decisions are based on the conservative one at first…that’s how you grow without overshooting the target 🎯

Part math, part mind reading

Even when you do have enough data, CLTV is never a fixed number.

Why? Because it’s built on behaviours, and they shift constantly.

• Your customers might buy more or less after a price change 💸
• Your best cohort last quarter might churn faster this quarter 📉
• That new feature you’re rolling out could help improve retention, or it could backfire 🔁
• Discount periods often attract low-retention bargain hunters who will never become loyal customers 🛍️
• Seasonal spikes like Black Friday, Christmas, Valentines Day often mean only one thing - customers that buy once and never return 🎄
• Short lived virality can cause a sudden influx of traffic, which can distort your cohort data for weeks 💥

That's why the most successful businesses treat CLTV as a moving target and not a number you calculate once and call it a day. You need to constantly revisit it, stress test it, slice it by channel, campaign and cohort.

The goal can’t be accuracy to the very cent, but it can give you confidence in your assumptions and the agility to keep adapting when user behaviour shifts (and it will shift!) 🪙

Why CLTV matters (more than you think)

CLTV isn’t just an accounting stat - it’s a compass for everything from ad budgets to retention plans and answers the one question every growth focused business is (or should be) constantly asking:

How much can I afford to spend to win a customer (and still make money)?

A lot of businesses measure success incorrectly, basing it on CPC (cost-per-click), ROAS (Return on Ad Spend) and short-term ROI (Return on Investment). But the kicker? None of those metrics tell you the whole story unless you pair them with CLTV.

You might be driving cheap clicks (a great CPC success story), and your campaign could be hitting 3 x ROAS on the first sale…but if those customers churn after one week, that initial win turns into a long-term loss.

That’s where CLTV flips the script.

Here’s how it transforms the way you measure and scale 🚀

1. Smarter ad spend: If your average CLTV is $250 and your CAC (customer acquisition cost) is $60, you’re in a pretty good position, even if your ROAS looks a little weak up front. You’re not aiming for immediate payback, you’re playing the long game 💰
   
   Think of it like getting the green light to scale with confidence, even if your first purchase ROI looks more break-even than profitable.
   
   If you're laser focussed on CPC, pairing it with CLTV tells you whether low cost traffic is actually valuable, or just cheap clicks that don’t bring staying power.
2. Real ROAS clarity, beyond the first sale: Your ad dashboard might show an ROAS of 1.5 (not terrible!), but if that’s only based on first-purchase revenue, zoom out. Factor in long-term customer value, and suddenly your true ROAS could be 3x or even 4x.
3. Campaign & channel prioritization: Let’s say you’re running Google and Meta ads at the same time. Google’s traffic is likely to cost more (given the platform's higher CPC), but CLTV shows those customers have double the retention. Meanwhile, Meta brings in cheaper clicks but a higher churn rate.
   
   CLTV is the microscope that reveals which channels bring in the quality customers, not just the quantity.
4. Product & pricing strategy: High CLTV customers often tend to stay close to specific products, features or pricing tiers - once they’ve found what they like or their sweet spot, you’ve struck gold!
   
   Use those insights to steer product development, refine pricing and tailor offers to nudge more customers into high-value behaviour.
   
   CLTV isn't just a marketing metric, is a product signal in disguise 🕵️
5. Business valuation: Every investor wants to know two things - how much it costs you to acquire a customer and how much will that customer be worth over the lifetime of their relationship with your business.
   
   Your CLTV:CAC ratio helps you to answer both in one go.
   
   If you’ve got a healthy ratio (lets say a 3:1 or better) then you’ve got sustainable growth and some efficient scaling options. A weak ratio? Red flag time.
   
   In short, CLTV is the bridge between short-term ROAS and long-term ROI.
6. Lifecycle efforts: We’ve all been there, the product teams made some changes to the onboarding flow and now its validation time. But is it working? Watch CLTV by cohort - if it rises, your new lifecycle changes might just be working.

The bottom line? CLTV gives you context to every other performance metric you’re probably already tracking. Whether its ROI, CPC or CAC, they all tell a part of the story - but CLTV shows you whether any of it is actually leading to lasting value.

Metrics you should tie to your CLTV

CLTV might be the big boss stat here, but it doesn’t stand alone.

It’s built from a bunch of other numbers that can tell you how often people are buying, how long they stick around for and how much they spend - if those change, your CLTV changes with them.

Here’s a handy breakdown of the key metrics that help to feed your CLTV:

CAC (Customer Acquisition Cost)

How much did it cost me to win that new customer?

If CLTV is what you make, CAC is what you’ve spent to make it.

Our tip is you want your CLTV to be at least 3x your CAC, for example, if you spend $50 to get a customer and they bring in $150 over time, that’s a solid figure. But if you spend $80 and they only spend $90, you’re basically breaking even (and that’s where no-one wants to be long term).

ROAS (Return on Ad Spend)

This shows you how much revenue you make for every $1 you’ve spent on ads.

Most platforms only show short-term ROAS, based on the first sale that customer made, but real ROAS comes from what the customer spends over their lifetime - enter CLTV.

For example, if your ads cost $100 and you make $120 on first purchases, you’ve got a 1.2x ROAS. But if that customer ends up spending $300 in total, your true ROAS is 3x.

AOV (Average Order Value)

This one tells you how much customers are spending, on average, per checkout.

The higher the AOV, the more revenue you’re making each time they buy.

Our tip? Don’t obsess over big one-time orders, repeat buys matter more.

Purchase frequency

How often do your customers come back, and most importantly, buy again?

Repeat purchases means a higher CLTV, so make sure you champion your email flows, SMS reminders, offers & loyalty perks to promote those repeat purchases.

Customer lifespan (or churn)

How long are your customers sticking around for, before they stop buying?

A short lifespan = low CLTV.

Long lifespan? Your CLTV is only going to keep climbing. 

Monitor your churn closely, even small improvements can lead to big CLTV gains 💪

Payback period

How long does it take for you to earn back your ad spend?

If you have a great CLTV but it takes you 9 months to break even, that’s going to be pretty tough on cash flow. 

Faster payback = healthier growth. For solid momentum, you’ll want to aim to recover your CAC within 1-3 months.

🔥Bonus tip: Break it down by channel or campaign. Your CLTV, CAC, ROAS etc all change depending on where your traffic is coming from. Google Ads might have a higher CAC, but bring in loyal, repeat buyers whereas Meta might drive cheaper traffic that churns fast.

When you segment your metrics by source or campaign, you’ll be able to spot what's truly profitable, and what’s just noise.

How to improve your CLTV (without reinventing the wheel)

Now you know what CLTV is and how to measure it, you can move onto the next step…improving it.

Your CLTV isn’t set in stone, and ultimately, it’s shaped by how you treat your customers after the first sale. For marketers, you’ve got yourself a slot machine type lever and the end goal is to keep pulling it to turn one-time buyers into loyal, repeat customers.

Here’s how you can boost your CLTV like a pro:

Win repeat purchases 🧲

The quickest way to increase your CLTV is to get customers to buy again…it’s as simple as that!

You could try a few different tactics, from email flows when you detect an abandoned cart or as a post-purchase upsell, to SMS nudges and loyalty programs - find what works best for you (and more importantly, your audience).

🔥Pro tip: Use data from your marketing analytics (or try Hitprobe 👋) to find the exact point when people drop off, and hit them with an offer before that happens.

Increase your AOV, without pushing 💸

More money per order = a higher CLTV. But…nodoby likes a hard sell. 

Instead, you could try offering bundles, “frequently bought together” suggestions, tiered pricing, volume discounts or even free shipping thresholds (i.e. “Spend $10 more for free delivery”).

Don’t forget, the idea is to add value, not pressure, so keep it simple.

Improve retention with some post-purchase TLC

A CLTV killer? You stop caring once a sale is done. 

Instead, make sure you stay in the game with follow up content associated with the sale (think “how to get the most out of your new product”) and check in emails where you can suggest complimentary products or methods to get more from your purchase.

Think of post-sales as the new pre-repeat, all you’ve got to do is keep your products or services top of mind.

Educate & empower 🧠

CLTV is proven to increase when customers actually use and understand what they bought. This includes features & benefits, perks, great product support and documentation. 

If you’re looking to try something a little different, you could test video tutorials, mini guides or email drips to keep interest high, and product understanding even higher.

Lets face it, the greater the value, the longer they stay a repeat customer.

Personalize the experience ✏️

Generic = forgettable, personalized = profitable.

You can boost your CLTV by offering product recommendations based on previous purchases or dynamic offers based on real behaviour (like when someone views a product, but doesn’t make a purchase). 

Remember, the more personal the experience, and the more relevant the message, the more often they come back.

Run re-engagement campaigns 📣

Customers not buying isn’t a criminal offence, but letting them drift off into “dead list” territory without trying to re-engage them…that is.

Bring them back with holiday/seasonal offers, win-back emails (we’ve all had a “come back to us, we miss you” style email before), or exclusive sales just for past customers - it’s all about bringing lost customers back into the fold.

Gather feedback and build better with it 💬

Customers that feel heard stick around longer, feel valued, and spend more.

Use customer surveys to learn why people don’t return, explore what features or products they want next and ultimately, build a community - CLTV is partly based on trust, using the feedback shows you’re listening.

Wrapping it up: CLTV isn’t a crystal ball, but its close

This all might seem a little like guesswork, and honestly, sometimes it is 🔮

But with the right levers, and a smart marketing strategy, your CLTV can become one of the most powerful growth levers in your entire business.

It shows:

• Which channels are really worth it, giving you the focus to double-down on what’s working 💰
• What’s actually driving customer loyalty 🎯
• How much value is your brand truly delivering over time 🛍️

And most importantly? It helps you to stop chasing on-off wins and start playing the long game - that’s where your margins grow, your customers return, and long-term growth becomes more sustainable.

Smart marketers use CLTV as a guide, not gospel.

Track it, improve it, segment in and learn from it.

Whether you’re scaling your ad spend, reworking your funnel, or just getting to grips on measuring customer value, CLTV is your cheat code to making smarter, more profitable decisions. 

Go put it to work 💪