Two models
Model 1, simple (revenue): average order value times purchases per year times lifespan in years.Model 2, margin-based: Model 1 times the gross margin, so it counts profit rather than revenue. With churn, the lifespan is one divided by the annual churn rate.
Model 1 = order value × purchases per year × lifespan Model 2 = Model 1 × gross margin %
Lifespan from churn = 1 ÷ annual churn. Nothing is rounded until the result is shown.
Example: known lifespan
Average order $50.00, 4 purchases a year, lifespan 3 years, gross margin 40%.
- Revenue per year: $50.00 × 4 = $200.00
- Model 1, simple: $200.00 × 3 = $600.00
- Model 2, margin-based: $600.00 × 40% = $240.00
Example: lifespan from churn
The same customer, with 25% annual churn instead of a known lifespan.
- Lifespan: 1 ÷ 0.25 = 4 years
- Model 1: $200.00 × 4 = $800.00
- Model 2: $800.00 × 40% = $320.00
Questions
Which model should I use?
Model 1 (simple) counts revenue only. Model 2 (margin-based) counts the gross profit each customer brings, which is closer to what a customer is worth to you. Enter a gross margin to see Model 2.
How does churn give a lifespan?
Lifespan = 1 ÷ churn. At 25% annual churn, a customer lasts 1 ÷ 0.25 = 4 years on average. This assumes the same share of customers leaves each year, which real customers rarely do.
What if I know monthly churn?
The lifespan in months is 1 ÷ monthly churn. Divide by 12 and enter the years, or multiply monthly churn by 12 as a rough annual figure.
Does CLV include the cost of winning the customer?
No. Compare it with the customer acquisition cost; that calculator takes a CLV and gives the LTV:CAC ratio.
Are these definitions standard?
No. They are common simple models. Businesses define customers, orders, margin and lifespan differently, so compare only figures built the same way.