How to calculate LTV
For a repeat purchase business: LTV = average order value × orders per year × customer lifespan in years × gross margin rate. A customer who spends $70 per order, orders 4 times a year for 3 years at a 40% margin is worth $336 in gross profit.
For a subscription: LTV = (average monthly revenue per customer × gross margin rate) / monthly churn rate. Average lifespan is the inverse of churn: with 4% of customers canceling each month, a customer stays 25 months on average.
Why LTV changes your decisions
It sets your maximum acquisition cost. With an LTV of $900 in gross profit and an LTV to CAC target of 3, you can spend up to $300 to win a customer, even if the first order only brings in $50. That reasoning is what lets a brand accept a low first-order ROAS.
It can also be calculated by channel: customers acquired through deep discounts often have a lower LTV than those who came from a branded search or a referral. Two channels with the same CAC are therefore not worth the same.
Calculation traps
Recalculate LTV at least once a year and by cohort, meaning customers grouped by the month they were acquired: it shows whether recent customers are worth more or less than older ones.
- Using revenue instead of gross profit, which overstates what you can spend.
- Using an average inflated by a few very large customers: check the median too.
- Projecting a five-year lifespan from six months of history.
- Ignoring recurring service costs such as support, shipping and loyalty discounts.