# Lifetime Value Calculation for Non-subscription Ecommerce stores

Gain a comprehensive understanding of LTV metrics unique to this model and learn how to accurately measure the long-term value of your customers. ## How to Calculate Customer Lifetime Value For Non-Subscription Ecommerce Stores?

Did you know that only 42% of ecommerce companies are able to calculate their customer lifetime value?

That’s quite alarming!

You can use CLV as a benchmark to check your store’s profitability, as it accounts for key metrics for its calculation such as customer acquisition cost (CAC), cost of goods sold (COGS), retention rate, and gross profit.

Not knowing how to calculate lifetime value can lead to loss of essential insights, resulting in poor decision making during your standard operations and marketing activities.

So, to help you figure out, we’ve created this quick guide to calculate CLV, specifically for non-subscription ecommerce stores.

But, Is it possible to calculate CLV for non-subscription ecommerce stores?

A common misconception is that CLV is only good for subscription business models. But that’s not true. Though CLV is a bit easier to calculate for subscription model businesses, it is nonetheless an essential metric for non-subscription businesses too.

Unless you run an online store which sells products that can only be purchased once in a while, for example mattresses, CLV is not that complex to calculate.

Let’s look at the formulas we’d need to figure out this metric.

Formulas Used to Calculate Customer Lifetime Value

A common CLV formula that you’ll come across is Average Order Value X Average Number of Orders per Year.

Undoubtedly, this formula is easy and simple and it can also reveal the value of a single customer. However, when you have a large group of customers, you need to factor in other metrics to find the per customer LTV.

Here are some of the formulas we’d need during this process.

Rate of Retention

Retention Rate gives us the percentage of customers retained during a given period of time. The formula to calculate this metric is:

Rate of Retention = (No of Customers Retained / Total Number of Customers Acquired) x 100

Churn Rate

Churn rate is also an important metric that provides the number of customers lost during a period of time. It is the exact opposite of retention rate and so is its formula.

Churn Rate = 1 – (Rate of Retention)

Average Order Value (AOV)

Average order value gives us the average of all the orders placed by a customer within a time period. The formula we’ll be using is:

Average Order Value (AOV) = Revenue / Number of Orders

Cost of Goods Sold (COGS)

COGS is an important factor to key in during our calculations. The formula for it is:

COGS = Beginning Inventory + Purchases in Current Period – Ending Inventory

Customer Acquisition Cost (CAC)

To acquire customers, you’ll have to spend on marketing. That’s why it’s important to consider customer acquisition costs when calculating CLV. To determine CAC for each customer, the formula we use is:

CAC = Total Cost / Total Customers Attained

Revenue

The next step is to find the Revenue. That is revenue before costs, within the given time period.

In some cases, you may already have revenue for a time period. In such cases, you’ll have to reverse engineer the COGS, AOV, Churn rate, etc.

In this calculation, we will be using the following formula:

Revenue = Number of Orders * Average Order Value

Gross Profit

To determine gross profit, we use the following formula:

Gross Profit = Revenue – COGs (product cost)

Gross Margin

Gross margin reveals the percentage of gross profit against the revenue. Here’s the formula:

Gross Margin = Gross Profit / Revenue

Before you can figure out lifetime value, you need to find the lifetime revenue. The formula that you’d typically use is:

Lifetime Revenue = Revenue – Product Costs – CAC – Handling Costs

However, in this calculation, we will be use the following:

Lifetime Revenue = Gross Profit – CAC

Cumulative LTV

Adding each month’s lifetime revenue with the next will give us the Cumulative LTV over the time period.

Cumulative CLV = Month 1 + Month 2 + Month 3 … + Month n

Finally, to calculate per customer lifetime value, we will use:

Per Customer LTV = Cumulative CLV / Number of Customers Originally Acquired.

Let’s put all these formulas into action and find customer lifetime value for a cohort of customers.

To keep the calculation simple, we will have some predetermined metrics as follows:

COGS as 40% of the revenue

Total Ad Spend (CAC) as \$500

Total acquired customers for the given time period as 100 customers.

We will also consider the average order value to be \$20, assuming that each customer places only one order.

Let’s look at the number of customers retained during a period of 5 months and determine the customer lifetime value in a step by step process.

A common CLV formula that you’ll come across is Average Order Value X Average Number of Orders per Year.

## Step 1: Calculate the Rate of Retention

Let’s start by determining the rate of retention of the customers acquired in Month 0 over the period of 5 months.

Using the formula mentioned earlier, Rate of Retention = No of Customers Retained / Number of Customers,

For month 1, retention is (40/100) x 100 = 40%

Likewise, here are the retention rates for month 2, 3, 4, and 5.

## Step 2: Calculate the Churn Rate

Now that we have the retention rate, we can easily calculate the churn rate. So the formula for churn rate is: 1 – (Rate of Retention).

For month 1, the churn rate is 60%. For the following months, the churn rate is as follows:

## Step 3: Calculate the Revenue Over 5 Months

To calculate the gross revenue of the customers retained from month 0 to month 5, we will use the formula: Revenue = Number of Customers * Average Order Value.

## Step 4: Determining Cost of Goods Sold (COGS)

For this calculation, we’ve set the COGS to be 40% of revenue. Typically, to calculate COGS, you can use COGS = Beginning Inventory + Purchases in Current Period – Ending Inventory. Or you can also use its variant COGS = product cost X quantity sold.

However, considering our predetermined COGS %, the formula is be Revenue * COGS%.

## Step 5: Calculate Gross Profit and Gross Profit Margin

We then calculate the gross profit and gross margin.

The formula to Gross Profit is Revenue – COGs (product cost),
And the formula for Gross Margin is Gross Profit / Revenue.

## Step 6: Calculate the Lifetime Revenue

We need to consider CAC (customer acquisition cost) before calculating Lifetime revenue. Our CAC is \$500 as mentioned earlier. Now, the formula for Lifetime Revenue is Revenue – COGS (Product Costs) – CAC – Handling Costs. Since we have already determined gross profit and we’re not including handling costs, the revised formula is Gross Profit – CAC. That gives us the following:

## Step 7: Calculate Cumulative CLV and Per Customer LTV

It is finally time to calculate CLV.
To determine Cumulative LTV, we will use Month + Month. That is Month 0 + Month 1, Month 1 + Month 2, and so on.

Next, we determine Customer Lifetime Value, and the formula for that is Cumulative LTV/ Number of Customers Originally Acquired.

And that gives us the customer lifetime value of \$18.40 for this cohort of customers.

Now, using this figure, you can find out if your marketing campaign has been successful or not, by calculating the CLV to CAC ratio.

To do this we’ll have to figure out the Customer Acquisition Cost per customer.

In this example, we have our CAC as \$500 and total customers as 100. So that will give us the following:

CAC per customer = Total Cost / Total Customers Attained = \$500/100 = \$5.

Our per customer CLV is \$18.40 and per customer CAC is \$5.

So LTV/CAC is \$3.68, and the ratio is approximately 3:1, which is a perfect CLV to CAC ratio.

By learning this insight, you now know that you are making the right decisions and getting the right results. You can also check how you can improve this marketing campaign and get better strategies or work on increasing the lifetime value of retained customers.

That brings to the end of our CLV calculation. This is how you can calculate the customer lifetime value for ecommerce businesses which work on a non-subscription basis.

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