← Back to Customer Metrics
⏳
Customer Lifetime Value (LTV)
Estimates the total revenue a business can expect from a single customer account throughout the relationship.
How to Calculate Customer Lifetime Value (LTV)
The formula to calculate this metric is straightforward.
LTV = Average Order Value x Purchase Frequency per Year x Average Customer Lifespan (Years) x Gross Margin
A Real-World Example
Scenario: AOV = $50, Frequency = 6/year, Lifespan = 3 years, Margin = 40%
Lifetime Revenue: $50 x 6 x 3 = $900
LTV (with margin): $900 x 40% = $360
Why Customer Lifetime Value (LTV) Matters for Your Business
- Determines how much you can afford to spend on customer acquisition while remaining profitable.
- Highlights the financial impact of retention: keeping customers longer dramatically increases LTV.
- Enables customer segmentation to focus marketing on the most valuable segments.
Frequently Asked Questions
What is a good LTV?
The absolute number depends on your industry and pricing. More important is the LTV:CAC ratio, which should be at least 3:1.
How do I increase LTV?
Improve product quality, create loyalty programs, offer subscriptions, provide excellent customer service, and send regular email engagement.
What is the difference between LTV and total revenue?
LTV typically factors in gross margin to show profit. Total revenue LTV (without margin) shows the gross revenue a customer generates.