How to Calculate Customer Lifetime Value: Methods and Formulas

The simplest CLV calculation:

CLV = Average Order Value × Purchase Frequency × Customer Lifespan

Example:

• AOV: £75
• Purchase frequency: 2.5 orders per year
• Average customer lifespan: 3 years
• CLV = £75 × 2.5 × 3 = £562.50

This method is quick and useful for rough benchmarking but has weaknesses: it uses averages that mask variation, and customer lifespan is hard to estimate without long historical data.

In AskBiz: Analytics → CLV → Simple shows this calculation with your actual data.

Cohort-based CLV tracks the actual spending of customers who first purchased in the same month (a cohort) over time.

1. Group customers by their first purchase month (e.g. all customers who first purchased in January 2024)

2. Track their cumulative revenue month by month for 12–24 months

3. The cumulative revenue curve for a cohort is the actual CLV at each point in time

This is more accurate than the simple method because it tracks real behaviour rather than using averages. It requires at least 12 months of data for meaningful CLV curves.

In AskBiz: Analytics → CLV → Cohorts shows cohort curves for every monthly cohort going back to account creation.

RFM (Recency, Frequency, Monetary) scoring is the basis of most predictive CLV models:

• Recency: how recently did the customer last purchase?
• Frequency: how many times have they purchased?
• Monetary: how much have they spent in total?

Higher scores on all three dimensions predict higher future CLV. The model assumes that recent, frequent, high-spend customers will continue that behaviour.

AskBiz's predictive CLV model uses RFM plus additional signals (product category, channel, acquisition source). View predictions in Analytics → CLV → Predictive with confidence intervals showing the range of predicted values.

To convert revenue CLV to profit CLV:

Profit CLV = Revenue CLV × Gross Margin %

For a more precise calculation:

Profit CLV per order = (Revenue − COGS − Fulfilment − Returns − Customer service) × Repeat purchase frequency × Lifespan

Example with more detail:

• Revenue per order: £75
• COGS: £25 (33%)
• Fulfilment: £5
• Returns (5% × £75): £3.75
• Gross profit per order: £41.25
• 2.5 orders/year × 3 years = 7.5 orders
• Profit CLV = £41.25 × 7.5 = £309

Enter your COGS in Settings → Products → Cost of Goods for AskBiz to calculate profit CLV automatically.

Using mean vs median: average CLV is skewed by high-value outliers (your top 5% of customers who spend 10× the average). Median CLV is more representative of a typical customer.

Not discounting future cash flows: a pound of revenue in year 3 is worth less than a pound today. Discounted CLV accounts for this. AskBiz applies a 10% annual discount rate to multi-year predictive CLV calculations by default. Change in Analytics → CLV → Settings → Discount Rate.

Treating all customers as one cohort: CLV varies enormously by acquisition channel, geography, and first-purchase product. Always segment CLV rather than relying on a single number.