What customer lifetime value means
Customer lifetime value (LTV or CLV) is the total profit you can expect from an average customer over the whole relationship. It sets the ceiling on what you can spend to acquire one. Every ad budget decision is really an LTV decision.
LTV = Average order value × Orders per year × Gross margin × Customer lifespan (years)
Customer lifespan = 1 ÷ Annual churn rate
Use gross-margin LTV, not revenue LTV, when comparing with acquisition cost. A $600 revenue LTV at 60% margin is only $360 of profit to pay for marketing.
Worked example
A skincare brand’s customers spend $50 per order, order 4 times a year and stay for 3 years. Gross margin after product and shipping is 60%. Revenue LTV is $50 × 4 × 3 = $600. Profit LTV is $360. If it costs $100 in ads to win a customer, LTV:CAC is 3.6 : 1, and the $100 is paid back in 10 months ($100 ÷ $10 gross profit per month).
The LTV:CAC ratio
| LTV : CAC | What it means |
|---|---|
| Below 1 : 1 | Every new customer loses money. Stop scaling. |
| 1 : 1 to 3 : 1 | Profitable on paper, but little room for overheads, returns or rising ad costs. |
| 3 : 1 | The common rule-of-thumb target for healthy growth. |
| Above 5 : 1 | Very efficient. You may be under-investing in growth. |
How to raise LTV
- Increase purchase frequency with replenishment emails, subscriptions or bundles.
- Raise order value with cross-sells and free-shipping thresholds.
- Reduce churn by fixing the first 30 days: onboarding, delivery speed and support.
- Protect margin. Discounts raise revenue LTV but can lower profit LTV.
Be careful with lifespan. New brands rarely have three years of data, so use a conservative estimate, or calculate from churn, and revisit it every quarter.
Frequently asked questions
How do you calculate customer lifetime value?
Multiply average order value by orders per customer per year, by gross margin, and by customer lifespan in years. $50 × 4 × 60% × 3 years gives a $360 profit LTV.
What is a good LTV to CAC ratio?
A ratio of about 3:1 is the common target. Below 1:1 each customer loses money; well above 5:1 can mean you're under-spending on growth.
How do I calculate customer lifespan from churn?
Customer lifespan in years is 1 divided by your annual churn rate. 25% annual churn means an average lifespan of 4 years.
Should LTV use revenue or profit?
Use gross profit when comparing against acquisition cost. Revenue LTV overstates what you can afford to spend on ads.
What is CAC payback period?
The number of months of gross profit from a customer needed to cover what you paid to acquire them. Shorter payback means you can reinvest in growth faster.