720 is the example result. This simplified LTV multiplies order value, purchase frequency, margin and lifespan. It does not discount future cash flows or model changing retention.
Estimate the gross-margin contribution a customer may generate across the lifespan entered. The model combines average order value, purchases per year, gross margin and years. It is a simplified estimate, not a forecast of each customer’s cash flows.
How the customer value estimate works
Average order value multiplied by yearly purchase frequency estimates annual revenue per customer. Apply gross margin to estimate contribution, then multiply by lifespan. This assumes that order value, purchase frequency and margin stay constant. Use figures that describe the same customer segment instead of combining unrelated averages.
Test retention before setting an acquisition budget
A lifespan assumption can materially change the output. Compare a shorter observed retention period with your expected period and note which figure has supporting evidence. A customer segment with frequent small orders may differ from one with occasional large purchases even if their average revenue looks similar.
What this model leaves out
The formula does not discount future cash flows or model changing retention, additional service costs or acquisition spending. Keep it separate from total revenue lifetime value. Compare it with acquisition cost on a consistent basis and use a fuller model when purchase behaviour changes substantially over time.
Example with the supplied inputs
Average order value: 120; Purchases per year: 4; Gross margin: 50; Customer lifespan in years: 3. Result: 720. The values are illustrative.
Compare one changed input
Average order value changes from 120 to 132. The result becomes 792. All other inputs remain fixed.
Calculation rule
Result = [Average order value] × [Purchases per year] × ([Gross margin] ÷ 100) × [Customer lifespan in years]
Inputs and output
| Input | Example value | Entry convention |
|---|---|---|
| Average order value | 120 | Use the source quantity represented by average order value. Keep the counted population fixed and avoid mixing a unit value with a period total. |
| Purchases per year | 4 | Use the source quantity represented by purchases per year. Keep the counted population fixed and avoid mixing a unit value with a period total. |
| Gross margin | 50 | Enter gross margin on the percentage scale used in the formula (20 means 20%, not 0.20). Keep its base and reporting period consistent with the other inputs. |
| Customer lifespan in years | 3 | Use the duration unit stated in customer lifespan in years. A time period is not interchangeable with a currency amount or a count of events. |
Output: 720 is the example result. This simplified LTV multiplies order value, purchase frequency, margin and lifespan. It does not discount future cash flows or model changing retention. Use the formula to distinguish a cash amount, count, percentage or ratio.
How to use the page
Collect the inputs
Gather Average order value, Purchases per year, Gross margin. Use one period and the units shown in the form.
Run the calculation
Enter the values and select the action. The calculation rule above explains how the inputs produce the result.
Compare a scenario
Change Average order value on its own, keeping the other inputs fixed. Read both results before changing another assumption.
Worked example
With the example inputs listed above, the result is 720.
Change Average order value from 120 to 132 while keeping every other value fixed. The result becomes 792. This comparison isolates that input; it does not forecast how other variables will respond.
Check the stated formula, units and limits before using the result in a decision.
Keep the displayed formula, input units and model scope with the result. Corrections or questions can be sent through the request section on this page.