How much is a customer worth over their full relationship?
Customer lifetime value is the single number that connects acquisition spend, retention effort, and pricing decisions. If you do not know it, you are making those decisions blind. Here's how to calculate it.
The short answer
Customer Lifetime Value (LTV) = Average revenue per customer per month x Average customer lifespan in months. If your average customer spends $1,200/month and stays for 18 months, their LTV is $21,600. For a gross-margin-adjusted version, multiply by your gross margin percentage: $21,600 x 62% = $13,392 in gross profit over the relationship.
Why customer lifetime value is the number that governs your business
Every major business decision connects back to LTV. How much can you spend to acquire a customer? Depends on their LTV. Should you invest in retention programs? Depends on whether they extend LTV enough to justify the cost. Can you afford to discount for a new client? Only if the lifetime revenue covers the margin hit.
Most business owners have never calculated LTV. They make acquisition decisions based on gut feel. They set prices based on what competitors charge. They run retention programs because someone said they should. All of these decisions would be sharper with a real LTV number.
A $21,600 LTV customer justifies a very different acquisition budget than a $3,200 LTV customer. If you are treating them the same, you are either overspending to acquire low-value customers or underinvesting in acquiring high-value ones.
The LTV formula and the three inputs you need
Customer lifetime value has three components:
The revenue-based version (without gross margin) tells you total revenue per customer. The margin-adjusted version tells you total gross profit per customer. Use the margin-adjusted version when comparing LTV to customer acquisition cost (CAC).
How to calculate customer lifetime value from QuickBooks Online
- 1Calculate average revenue per customer
Go to Reports → Sales by Customer Summary. Set to the last 12 months. Sum all customer revenue (the grand total) and divide by the number of unique customers listed. That is your annual ARPC. Divide by 12 for monthly.
- 2Calculate or estimate average customer lifespan
If you know your monthly churn rate (see our churn rate guide), divide 1 by that rate. Example: 1 / 0.04 = 25 months. Or export Sales by Customer Detail for all time and calculate first-to-last purchase span for churned customers.
- 3Get your gross margin from the P&L
Go to Reports → Profit and Loss. Find Gross Profit and divide by Total Income. Example: $57K gross profit / $92K revenue = 62% gross margin.
- 4Multiply the three numbers
ARPC ($1,200/mo) x Lifespan (25 months) x Gross margin (62%) = $18,600 LTV. That is the gross profit you can expect from an average customer over their full relationship.
Total time: 20-30 minutes if you already have your churn rate. If not, add another 25-35 minutes for the churn calculation. LTV depends on metrics that are themselves time-consuming to pull.
How to calculate customer lifetime value from Xero
- 1Calculate ARPC from your invoice data
Export invoices from Business → Invoices for the last 12 months. Sum total revenue and count unique customers. Divide.
- 2Get customer lifespan from churn rate or invoice dates
Same approach as QuickBooks: 1 / churn rate, or calculate from first-to-last invoice dates for churned customers.
- 3Get gross margin from Accounting → Reports → Profit and Loss
Gross Profit / Total Revenue = gross margin %. Multiply all three inputs for your LTV.
Total time: 25-35 minutes plus the churn rate calculation if not already done. Xero requires the usual invoice export for customer- level data.
What it takes to keep LTV current
- LTV is a composite metric. It depends on ARPC, churn rate, and gross margin. Each of those is its own calculation. Getting LTV right means getting all three inputs right first.
- Averages hide variation. An average LTV of $18,600 might mean half your customers are worth $30,000 and half are worth $7,000. Segment-level LTV (by customer type, acquisition channel, or product line) is far more useful for decision-making.
- It changes slowly, but the changes matter. LTV shifts quarter to quarter, not month to month. But when it does shift, it signals a fundamental change in your customer economics that affects every downstream decision.
Or get customer lifetime value calculated automatically
Bottomline calculates LTV from your transaction data every month, using your actual churn rate, ARPC, and gross margin. You see the number, the trend, and the segment-level breakdown.
Because Bottomline already calculates churn rate, ARPC, and gross margin as part of your monthly report, LTV comes automatically as a derived metric. You do not need to pull three separate reports and combine them. The number is there, in context, every month.