LTV, also written CLV, stands for customer lifetime value. It estimates what a typical customer is worth to the business from the first purchase to the last. Most finance teams calculate it on gross profit, since revenue that goes straight to suppliers can't pay for marketing.
LTV is a forecast, not a fact. It relies on assumptions about how often people buy, how much they spend and how long they stay. A young company with a year of data is guessing more than one with five years of order history, so revisit the number as the data builds up.
Its main job is to cap what you spend on acquisition. Set it next to CAC and it tells you whether each new customer is worth more than they cost to win, and by how much.
Mechanics
Simple ways to estimate lifetime value
For a subscription business, divide monthly gross profit per customer by the monthly churn rate. If customers leave at 4 percent a month, the average one stays about 25 months, and LTV is 25 months of gross profit.
For a store with repeat buyers, multiply average order value by the number of orders a customer places per year, by the gross margin, and by the typical number of years a customer keeps buying. Each factor is a lever: better retention, bigger baskets and more frequent orders all raise the result.
Averages hide a lot. Customers who came in through different channels, offers or product lines often behave very differently. Cohort views, which group customers by the month or channel they arrived through, give a more honest picture than one company-wide figure.
Example
A worked example for a repeat purchase brand
Assume a coffee brand sells mostly through its own online store. Its average order is 42, a customer orders 5 times a year, and the gross margin after beans, packaging and shipping is 40 percent. Each customer produces 42 times 5 times 0.40, which is 84 of gross profit a year.
Say order history shows the average customer keeps buying for 2.5 years. LTV is 84 times 2.5, or 210.
Now compare with acquisition. If the brand pays 70 on average to win a new customer, the LTV to CAC ratio is 3 to 1, and the brand earns that cost back within the first year. If a new promotion lifts sign-ups but those customers only order four times before leaving, their LTV falls to 67.20, below the 70 it cost to win them.
Use
When LTV helps and when it misleads
- Use it to set the most you can pay to win a customer, especially for subscriptions and products people buy again and again.
- Use cohort LTV to compare channels, since a channel with pricier first orders may still bring customers who stay much longer.
- It misleads when built on revenue instead of gross profit, which makes almost any acquisition cost look affordable.
- It misleads in young businesses with short histories, where the assumed customer lifespan is a hope rather than an observation.
Watch out
Common mistakes with LTV
- Assuming customers stay for many years without data to back it, then spending on acquisition as if that future revenue were certain.
- Using one average LTV for every channel and offer, which hides segments that never pay back their acquisition cost.
- Forgetting that future profit is worth less than profit today, which matters when the assumed lifespan runs for several years.
- Never updating the estimate after price changes, new products or a shift in retention, so budgets rest on stale assumptions.
FAQ
Questions about LTV
How do I calculate LTV for a new business with little data?
With no history, build LTV from assumptions you can state openly: average order value, expected orders per year, gross margin and how long you expect a customer to stay. Treat the result as a working estimate. Replace each assumption with real numbers as your first cohorts age, and recheck the figure every quarter.
What LTV to CAC ratio should I aim for?
The right ratio depends on your cash position, how quickly a customer pays back their acquisition cost and how reliable your LTV estimate is. A business with plenty of cash can wait longer for payback, while one with a tight runway needs acquisition to pay back quickly. Decide the payback period you can afford first, then work backward.
Should LTV use revenue or gross profit?
Gross profit gives the more honest answer, because revenue includes money that goes straight back out for product costs, shipping and fees. An LTV built on revenue makes every channel look more affordable than it really is. If you only have revenue data, apply your average gross margin before comparing LTV with acquisition cost.
