Customer lifetime value: how to calculate it and how much to spend to win a customer
By Toby Dames. Published 5 November 2026.
A practical formula
Lifetime value = average order value × orders per customer × gross margin, over a fixed period such as 12 or 24 months.
Example: an average order of $85, 1.6 orders per customer over 24 months and a 55% margin after product and shipping costs. $85 × 1.6 × 0.55 = $74.80 of margin per customer.
Compare it with what it costs to win a customer
If it costs $47 to win a customer and they bring $74.80 of margin over 24 months, you earn $27.80 per customer after acquisition. If you judge only the first order of $85 × 0.55 = $46.75, you would call the same customer break-even. The difference is the repeat orders.
The same customer looks like a bad deal or a good deal depending on how long you measure.
Three mistakes to avoid
- Using revenue. You cannot spend revenue. Use margin.
- Using an average that hides the spread. Look at your top 10% of customers separately. They often drive a large share of repeat revenue.
- Projecting too far. A 5-year lifetime from 18 months of data is a guess. Stick to what you have seen.
What to do with it
Set a maximum acquisition cost and a retention budget from the same figure. Then check, by cohort, that real behaviour matches your assumption. If it does not, the number needs to change.
Questions
What time window should I use?
Twelve or twenty-four months works for most online stores. Pick one, keep it fixed and compare cohorts using the same window.
Should lifetime value include the cost of marketing to existing customers?
Yes. Subtract the cost of email, SMS and offers to get a profit figure you can rely on.
Is a higher lifetime value always better?
Only if it is profit. A rise driven by deep discounts can leave you with more revenue and less margin.
Want this worked out on your own data?
The free Profit Leak Detector takes a couple of minutes. Or book 30 minutes and we will look at your numbers together.