LTV
LTV, Lifetime Value (also CLV, Customer Lifetime Value), is the value of a customer over the entire relationship with the company: the sum of margins from all their purchases, not just the first one. It is the number that sets the acquisition ceiling: how much a company can afford to pay for a new customer without losing money. Companies that know their LTV can afford a higher CAC than their competitors, and that is how they win auctions.
In short
| Formula (basic) | LTV = average margin per purchase × purchase frequency × relationship length |
| What to measure it in | Margin. Revenue-based LTV overstates and leads to overpaying for acquisition |
| What drives it | Retention, purchase frequency and AOV. Three levers, each improved differently |
| What it is for | The CAC ceiling, segment prioritization, the case for retention investment |
How it is calculated
Formula and inputs
The basic formula: LTV = average margin per purchase × number of purchases per year × relationship length in years. Margin per purchase is the average order value net of VAT times the contribution margin, that is, after deducting the cost of goods, shipping, packaging, payment fees and returns. Frequency comes from order history: the number of orders in the last 12 months divided by the number of customers who bought at least once in that time. Relationship length is derived from retention: if half of the customers stop buying each year, the average relationship lasts 1 / 0.5 = 2 years. All three inputs are calculated for the same period and ideally per segment, because the average of the whole base hides the differences between them.
Example calculation
Worked example: an e-commerce store with repeat purchases, data from the last 24 months.
| Margin per purchase: average order €120 net of VAT × 35% contribution margin | €42 |
| Frequency: 25,000 orders / 10,000 buying customers in 12 months | 2.5 purchases per year |
| Relationship length: 50% of customers leave each year, 1 / 0.5 | 2 years |
| LTV = 42 × 2.5 × 2 | €210 |
| Cohort check: 2,000 customers with a first purchase in one month, margin of €170,000 over 12 months and €290,000 over 24 months | LTV12 = €85, LTV24 = €145 |
| CAC ceiling at a target LTV/CAC ratio of 3 | €70 by the formula, €48 by the cohort |
The formula and the cohort differ by €65. The formula works with averages of the whole base, which includes long-standing customers with high frequency. The cohort follows specific customers from their first purchase, including those who never came back, which is why it comes out lower. For setting the acquisition ceiling the cohort number applies; the formula serves for planning where cohort data does not exist yet.
Formula or cohorts
The cohort approach needs only an export of orders with date, customer and margin. Customers are grouped by the month of their first purchase; for each group the margin over the first 12 and 24 months is summed and divided by the number of customers in the group. The result is LTV12 and LTV24, measured rather than estimated. Newer cohorts do not have a full 24 months yet, so their progress is compared with the curve of older cohorts at the same age. The multiplicative formula is faster and suits a first estimate, modeling of changes (what a 10% increase in frequency does to LTV) and segments with a short history. Whichever method is used, what enters decisions is margin over a 12- to 24-month horizon, never revenue.
Why LTV changes the acquisition math
A worked example: an average order of 150 at a 30 percent margin carries 45. Looking at the first purchase only, you may pay less than 45 per customer. But when the customer buys four times over two years, their LTV is 180 and the acquisition ceiling has quadrupled. A competitor counting only the first purchase withdraws from the auction exactly where you can still afford to bid. That is the whole point: LTV is not a reporting metric, it is a competitive weapon in media buying.
From our own practice
Our strongest long-term value example comes from our own portfolio: we worked with Sanitino for six years, and revenue grew 948 percent over that time while expanding into 16 countries. A customer who stays and grows is exactly what LTV describes, and it applies to an agency's clients just as it does to a shop's customers: 90 percent of our clients stay with us five years or more. A long relationship is the cheapest growth there is.
Common mistakes
- Revenue-based LTV. Without margin, LTV is overstated and permits a CAC that quietly loses money.
- One average for everyone. Segments differ by an order of magnitude. The average overpays for bad customers and underinvests in good ones.
- Too long a horizon. A five-year LTV is speculation. For steering acquisition, 12 to 24 months is enough.
Related terms
See also CAC, LTV/CAC ratio, customer retention, churn and AOV.
Frequently asked questions
How do I calculate LTV without heavy tools?
From order history: average margin per customer over 12 and 24 months, grouped by the year of first purchase. A cohort table in a spreadsheet covers most decisions.
How do I grow LTV?
Three levers: retention (a reason to come back), frequency (reminders, CRM) and order value (AOV). Retention usually has the largest effect because it compounds the longest.
Does LTV matter for one-off products?
Less, but repeat purchases, accessories and referrals exist even there. When LTV genuinely equals the first purchase, margin discipline in acquisition matters all the more.
How we can help
We build acquisition economics from margin to LTV as part of our Performance marketing agency service.