E-commerce

LTV — Customer Lifetime Value

The total revenue a business can expect from a single customer over the entire relationship.

Definition

Customer Lifetime Value (LTV, also written CLV) estimates the total net revenue or profit generated by a customer over the entire duration of their relationship with a business. LTV is foundational to understanding how much you can afford to spend acquiring a customer (CAC). Businesses with a high LTV can outspend competitors on acquisition because they recoup their investment over time. LTV is especially critical for subscription businesses, SaaS companies, and brands with strong repeat purchase rates.

Formula

LTV = Average Order Value × Purchase Frequency × Average Customer Lifespan

Multiply the average order value by how often customers buy and how long they stay customers.

Example

A subscription box charges $40/month. Average customer stays 18 months. LTV = $40 × 12 months × 1.5 years = $720. You can afford up to ~$240 in CAC to maintain a 3:1 LTV:CAC ratio.

Key Points

LTV:CAC ratio of 3:1 is the benchmark for sustainable growth
Increasing LTV through retention is often more efficient than reducing CAC
Segmenting LTV by acquisition channel helps identify your most valuable customers
Predictive LTV models are used in paid media bidding to optimize for high-value users