If you run an online business, you’ve probably heard of customer lifetime value (LTV or CLV). It’s the total revenue you can expect from a single customer over the entire time they do business with you. Getting LTV right helps you decide how much to spend on acquisition, which channels to scale, and whether your unit economics are healthy. Here’s a clear breakdown of what LTV is, how to calculate it, and how to use it.
1. What is Customer Lifetime Value (LTV)?
Customer lifetime value is the total amount of revenue (or profit) you expect from one customer over their full relationship with your business. Instead of looking at a single purchase, LTV answers: “How much is this customer worth to us over time?”
For ecommerce, that might mean repeat purchases over years. For subscriptions, it’s the sum of all monthly or annual payments until they churn. The longer customers stay and the more they spend per order, the higher their LTV. LTV is often used together with customer acquisition cost (CAC): the ratio of LTV to CAC tells you whether your growth is sustainable.
2. How to Calculate LTV
A simple formula that works for many businesses is:
LTV = Average Order Value (AOV) × Number of Purchases per Year × Average Customer Lifespan (in years)
Example: If a customer spends $50 per order, buys 4 times a year, and stays for 3 years on average, LTV = $50 × 4 × 3 = $600.
For subscription businesses, you can use:
LTV = Average Revenue per User per Period (ARPU) ÷ Churn Rate
To get started, you need: average order value (or ARPU), purchase frequency (or retention/churn), and an estimate of how long customers typically stay. You can refine with gross margin if you want lifetime value in profit rather than revenue.
Use our free LTV Calculator to plug in your numbers and get LTV, LTV:CAC ratio, and payback period in seconds.
3. How to Use LTV: LTV:CAC Ratio and Payback Period
Once you know LTV, two of the most useful ways to use it are:
- LTV:CAC ratio – Divide LTV by your customer acquisition cost. A ratio of 3:1 or higher is often considered healthy: you earn $3 (or more) in lifetime value for every $1 spent acquiring the customer. Below 1:1 means you lose money on each new customer.
- Payback period – How many months (or years) of profit from a customer it takes to “pay back” the CAC. Shorter payback (e.g. under 12 months) improves cash flow and reduces risk when you scale acquisition.
These metrics help you decide how much to spend on ads, which channels are worth scaling, and whether to focus on retention (improving LTV) or acquisition (reducing CAC) first.
4. Why LTV Matters for Ecommerce and Marketing
LTV matters because it shifts the focus from a single sale to the full relationship. A customer who buys once for $30 might have an LTV of $200 if they come back and buy again. That changes how much you can afford to spend to acquire them. Without LTV, it’s easy to under-invest in acquisition (leaving growth on the table) or over-invest (burning cash on customers who never return).
Use LTV to set CAC targets, compare marketing channels, and prioritize initiatives that extend lifespan (e.g. email retention, loyalty programs) or increase order value (e.g. upsells, bundles). For a full picture, pair LTV with our LTV Calculator to see LTV:CAC and payback period for your own numbers.