What is a customer worth to you?
It is easy to judge marketing on the first sale and miss everything that follows it. This turns repeat purchases and margin into the profit one customer is likely to produce.
Lifetime value is the profit expected from one customer across the whole relationship, shrunk each year by your retention rate and discounted into today's dollars. Subtract what you spend to win them; aim for a value-to-acquisition ratio of 3× or better.
The math
How this works
How do you calculate customer lifetime value?
Start with what a customer spends in a year, which is the average purchase times the number of purchases. Apply your gross margin to that revenue, because the part that goes to materials, labor, and fees was never yours to keep. Carry the result across the years you want to count, reducing each year by the share of customers who do not come back, and subtract what you spend annually to keep a customer engaged. Discount the later years into today's dollars so a profit five years out is not counted the same as one this month. Subtracting the cost to acquire the customer leaves the number you can actually spend against.
What is a good ratio of lifetime value to customer acquisition cost?
This tool flags 3x or better, meaning a customer returns at least three times what it cost to win them. The reasoning is that lifetime value is an estimate built on retention and margin assumptions, so you want enough room for those assumptions to be wrong and the customer still to be worth having. A ratio near 1x means you are buying revenue, not profit. A very high ratio is not automatically good news either, because it can mean you are underspending and leaving customers for someone else to win. What matters more than the exact figure is watching the ratio move as you change channels, prices, or offers.
How do you work out your customer retention rate?
Pick a year and count how many distinct customers bought from you in it. Then count how many of those same customers bought again in the following year, and divide the second number by the first. Your invoicing or point-of-sale records usually hold this if you can sort by customer name, email, or phone number. Leave brand-new customers out of the calculation, since they were never at risk of leaving in the period you are measuring. If your records are messy, do it for one month's customers rather than a whole year and treat the result as a first read.
Questions people ask
Should lifetime value use revenue or profit?
Profit, which is why the calculator asks for your gross margin. Revenue per customer is a useful number for sizing an account, but it overstates what the relationship is worth to you, sometimes by a lot. If you compare a revenue-based lifetime value against your acquisition cost, you will conclude you can afford to spend far more than you can.
What if my customers buy irregularly?
Average it out. Add up the purchases a group of customers made over a couple of years and divide by the number of customers and the number of years to get purchases per year. For work that happens once every several years, such as a roof or a major install, consider counting referrals from that customer as part of their value and note that separately.
Why does the calculator discount future years?
Because a dollar of profit three years from now is worth less than a dollar today. You cannot spend it yet, inflation works on it, and the customer may not stay around to produce it. Discounting lowers the weight of later years so the lifetime figure is something you could reasonably borrow or budget against today.
My ratio is below 3x. What do I change?
There are four levers and they are all visible in the inputs. Spend less to win a customer, raise the average purchase or how often people buy, improve your margin, or keep customers longer. Retention is often the cheapest of the four, because the work is follow-up and service rather than more advertising.
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This is an estimate to help you think, not financial, tax or legal advice. Finli is not a bank and does not lend. Your own numbers, and your banker, beat any calculator.