A common LTV formula is average order value × purchases per year × customer lifespan × contribution margin. A $60 AOV, 3 orders a year, a 2-year lifespan, and a 50% margin give an LTV of $180. Using margin keeps LTV a profit figure.
Customer lifetime value
LTV (profit)
$180
$60 × 3/yr × 2 yrs × 50% margin
LTV here is profit, not revenue: AOV × purchases per year × lifespan × contribution margin. Using margin keeps it the figure you can compare against CAC — aim to keep LTV at least 3× CAC.
Use profit, not revenue
A revenue-based LTV overstates how much you can spend to acquire a customer because it ignores COGS and variable costs. Multiplying by contribution margin turns LTV into the spendable figure you compare against CAC. Improving retention (more orders per year, longer lifespan, lower churn) usually lifts LTV faster than raising prices.
Frequently asked questions
How do I calculate customer lifetime value?+
A common LTV formula is average order value × purchases per year × customer lifespan in years × contribution margin. A $60 AOV, 3 orders a year, a 2-year lifespan, and a 50% margin give an LTV of $180. Using margin keeps LTV a profit figure.
What is a good LTV:CAC ratio?+
A healthy LTV:CAC ratio is about 3:1 — each customer returns roughly three times what they cost to acquire. Below 1:1 you lose money on every customer; far above 3:1 can signal you're under-investing in growth.
Should LTV use revenue or profit?+
Use profit — contribution margin — not revenue. A revenue-based LTV overstates how much you can spend to acquire a customer because it ignores COGS and variable costs. Multiplying by your margin turns LTV into the spendable figure.
