What Is Customer Lifetime Value (CLV/LTV)? Formula

How to Work Out CLV

The usual formula multiplies three numbers you can pull from your order history:

CLV = Average order value × Orders per year × Years a customer keeps buying

Profit CLV = CLV × Gross margin

Orders per year is a year's orders divided by the customers who placed them. The last one, often called customer lifespan, isn't something you can look up. You have to estimate it.

Example: A loose-leaf tea store looks at its last 12 months. It made $200,000 from 5,000 orders placed by 2,000 customers.

Average order value = $200,000 ÷ 5,000 = $40
Orders per year = 5,000 ÷ 2,000 = 2.5
From past orders, the owner guesses customers keep buying for about 2 years
Revenue CLV = $40 × 2.5 × 2 = $200
Gross margin is 60%, so profit CLV = $200 × 0.6 = $120

So a typical tea customer is worth about $120 in gross profit over two years. That's before shipping, payment fees and ads.

What CLV Tells You About Ad Spend

The big money question CLV answers is how much you can pay to win a new customer. That cost is called customer acquisition cost, or CAC. It's your ad spend divided by the new customers it brought in.

Say the tea store pays $50 in ads for each new customer. The first $40 order earns $24 in gross profit. So on the first sale you're down $26. Over two years, though, that customer brings in $120 in gross profit. That's $70 more than they cost to win. If you only judged the first order, you'd stop these ads.

The math only holds if new customers really place about five orders over two years. Shoppers who came in through a new ad channel or a deep discount may not buy like your older customers. Check their repeat orders before you spend more.

Where to Find CLV Inputs in Shopify

You can build CLV from numbers that are already in your Shopify admin:

Customers page. Each customer shows their number of orders and total amount spent. That's what they've spent so far, not a forecast.
Returning customer rate. In Analytics, this is the share of buyers in a date range who have ordered more than once.
Customer cohort analysis. This report groups customers by when they first ordered. You can see how each group keeps buying over time.

Watch out for duplicates. If a shopper checks out with two email addresses, they can show up as two customers. Their orders get split, and CLV looks lower than it really is.

Repeat orders start with people coming back to your store. If you want more of those visits to end in a sale, see our guide to converting returning shoppers.

A Big CLV Number Can Hide a Loss

A common mistake is budgeting your ads against revenue CLV. The tea store's revenue CLV is $200, so paying $150 per new customer might look safe. But profit CLV is only $120. At $150 each, the store loses $30 on every customer, and that's before shipping and fees.

The average can fool you too. In many stores, lots of people buy once while a small group keeps coming back. A few big spenders can drag the average up. And if your store is young, with just one year of data, you're guessing at the "years" part anyway. Treat CLV as a rough range and recheck it as real orders come in.