Metrics

LTV (Lifetime Value)

The total revenue a business expects to earn from a customer over the entire duration of their relationship.

Lifetime Value (LTV), also called Customer Lifetime Value (CLV), represents the total profit a customer generates over their entire relationship with your business. It's calculated by multiplying average order value by purchase frequency by customer lifespan. For example, if customers spend €100 per order, purchase 4 times per year, and remain customers for 3 years, the LTV is €1,200. However, this should be adjusted for gross margin and discount rate to calculate true profit. LTV is essential for determining how much you can afford to spend on customer acquisition. If your LTV is €300 and you want a 3:1 ratio, you can spend up to €100 on CAC. Understanding LTV by channel and cohort helps you identify which acquisition sources bring the most valuable long-term customers, not just the most customers.

Related Terms

Frequently Asked Questions

What is LTV?

LTV (Lifetime Value) is the total profit a customer generates over their entire relationship with your business. It includes all purchases, repeat orders, and referrals, minus the cost of goods sold and servicing costs. LTV helps determine how much you can afford to spend on customer acquisition.

How do you calculate LTV?

Calculate LTV using: Average Order Value × Purchase Frequency × Customer Lifespan × Gross Margin. For example, if customers spend €100 per order, buy 4 times per year, stay for 3 years, and you have 40% margin: €100 × 4 × 3 × 0.40 = €480 LTV.

What is a good LTV:CAC ratio?

A good LTV:CAC ratio is 3:1, meaning each customer generates 3x their acquisition cost in profit. Ratios below 2:1 indicate unprofitable growth, while ratios above 5:1 suggest you're under-investing in acquisition and leaving growth on the table. Most healthy e-commerce brands maintain 3-4:1 ratios.

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