How to calculate customer lifetime value
Customer lifetime value is what one customer is worth to you across the whole relationship, not just the first order. Multiply what they spend on an average order by how often they buy in a year, then by how many years they keep buying. That figure is what decides how much you can afford to pay to win a customer in the first place.
Most accounts are judged on the first purchase alone, which is why so many profitable campaigns get switched off. A brand with a ₹2,500 order value looks like it can only afford a few hundred rupees per sale. The same brand, where customers order three times a year for three years, can afford several thousand — and will out-bid the competitor still measuring the first click.
The customer lifetime value formula
The version above is the one worth starting with: average order value × purchases per year × customer lifespan in years. It uses numbers you already have in your ecommerce platform, and it is close enough to make decisions with.
Two refinements matter once you are using it seriously. Multiply by gross margin if you want lifetime profit rather than lifetime revenue, which is the more honest number to compare with acquisition cost. And if you have more than about two years of order history, take the lifespan from what your cohorts actually did rather than from an estimate — a guessed lifespan is the single biggest source of error in this calculation.
A skincare brand with an average order value of ₹2,500, three orders a year, over three years:
₹2,500 × 3 × 3 = ₹22,500 lifetime value. Against a ₹1,800 acquisition cost that is a 12.5 : 1 ratio — comfortably healthy, and a sign they are under-investing in acquisition rather than over-investing.
What is a good CLV to CAC ratio?
Three to one is the benchmark most of the industry works to: a customer worth three times what it costs to acquire them leaves enough to cover overhead, fulfilment and the customers who never come back. Below three, growth becomes hard to fund. Below one, every new customer makes the problem worse.
- Under 1 : 1 — you are paying more than the customer is worth. Fix pricing, margin or retention before spending more.
- 1 : 1 to 3 : 1 — workable but tight. There is little room for a bad month or a rising cost per click.
- 3 : 1 to 5 : 1 — healthy. This is the range most sustainable ecommerce accounts sit in.
- Above 5 : 1 — usually means you are under-spending. You could afford to bid harder and grow faster.
CLV benchmarks by business model
What counts as a good lifetime value depends far more on how often people buy than on what they spend. Consumables and subscriptions build value quickly; considered, one-off purchases never will, and should not be judged as if they could.
| Business model | Typical repeat rate | What drives CLV |
|---|---|---|
| Consumables and beauty | 3–6 orders a year | Reorder timing and subscription |
| Fashion and apparel | 2–4 orders a year | Range breadth and returns rate |
| Jewellery and high value | Under 1 a year | Order value, not frequency |
How to increase customer lifetime value
Every lever in the formula is one you can move. Order value responds to bundling, tiered shipping thresholds and genuinely relevant cross-sells. Frequency responds to reorder reminders timed to when the product actually runs out, and to subscriptions where the product suits one. Lifespan responds to the unglamorous things: the second order landing on time, and support answering quickly when it does not.
The acquisition side matters just as much. Once you know a customer is worth ₹22,500 rather than ₹2,500, campaigns that looked wasteful are often the ones bringing in your best customers. That is usually where a Google Ads account review finds the most: budget held back from the audiences with the highest lifetime value, because the account was being judged on the first purchase.