What Is LTV?

LTV is the total profit a customer generates across the full relationship with your business. It answers one practical question: how much money does one customer produce before they disappear. That number determines how aggressively you can acquire customers, which is why LTV gives meaning to CAC in a way first-order revenue never can.

The Formula

This is a simplified estimate, not a precise LTV model. It ignores cohort decay (later cohorts often behave differently), contribution margin per order, and time-to-cash. For real operating decisions, use cohort-based gross profit. But for a quick directional number, this formula works.

LTV = AOV × Purchase Frequency per Year × Customer Lifespan in Years
Gross LTV = LTV × Gross Margin %

If AOV is €50, customers order 3 times per year, and average lifespan is 2 years, revenue LTV is 50 × 3 × 2 = €300. If gross margin is 40%, gross LTV is €120. A healthy 3:1 LTV:CAC ratio would support CAC up to about €40.

What's a Good LTV?

Below 1:1, the business is losing money on acquisition. Between 1:1 and 3:1, recovery is possible but the economics are tight enough that payback speed matters. Between 3:1 and 5:1 is a strong operating range for many ecommerce brands, but even a 3:1 ratio can still be unhealthy if payback takes more than six months or if LTV is modeled rather than observed from cohorts. Above 5:1 usually signals very strong retention or overly cautious spending, so the question shifts from "is this safe?" to "are you under-investing in a channel that works?"

The real use of LTV is not vanity reporting. It is budget setting. A store with €120 gross LTV can rationally pay more to acquire a customer than a store with €48 gross LTV, even if both have identical first-order conversion rates. Businesses that ignore this usually underinvest in channels that are actually working.

LTV also highlights how different customer cohorts behave. Search-acquired buyers often buy with higher intent. Subscription buyers frequently produce more repeat revenue. Discount-led customers can look good on first order count and still produce weak lifetime profit. Treating all customers as one average hides those differences.

For young brands, LTV should be conservative by default. If you only have six months of repeat-purchase history, use observed reorder behavior rather than assuming a mature retention curve you have not earned yet.

Common Mistakes

Calculating LTV from revenue instead of profit. A customer who spends €300 at a 30% gross margin creates €90 of gross LTV, not €300 of usable acquisition budget.
Using industry-average retention assumptions. If your actual customers reorder 1.8 times per year, plugging in 3.0 turns a weak business into a fictional healthy one.
Looking only at historic LTV for a young brand. If cohort data is immature, use conservative trailing data instead of optimistic full-lifespan guesses.

Related Tools

Maximum CAC Calculator turns customer value into an allowable acquisition cost.

Break-Even ROAS Calculator is useful when you need the minimum ad efficiency threshold at the product level instead of the customer level.

Related Terms

The next pages that usually matter after LTV are CAC, AOV, and gross margin.