How to calculate customer lifetime value
What you'll learn
- →The simple, advanced, and predictive LTV formulas
- →Why LTV > 3x CAC is the rule of thumb
- →How to segment LTV by cohort
- →Common LTV mistakes
Before you start
- □12+ months of order data
- □A spreadsheet
LTV is the most-cited and most-misunderstood metric in marketing. Here's how to calculate yours simply and use it for real decisions.
The steps
- Step 01
Start with the simple formula
LTV = average order value × purchases per year × years retained. For a $40 AOV, 4x/year, 3-year retention = $480.
- Step 02
Add gross margin for true LTV
Multiply by gross margin %. A 60%-margin business with $480 revenue LTV has $288 LTV.
- Step 03
Calculate by cohort
Group customers by acquisition month. Compare retention curves. The first cohort behavior is often misleading.
- Step 04
Compare LTV to CAC
Healthy: LTV ≥ 3x CAC. Below 1x = unsustainable. Above 5x = under-investing in growth.
- Step 05
Recalculate quarterly
Retention, AOV, and frequency drift. Stale LTV = bad decisions.
- Step 06
Don't use lifetime forever
Cap at 3–5 years. Predicting beyond that is fiction.
- Step 07
Segment by channel and product
Customers from email may have 2x the LTV of customers from paid social. Reallocate spend accordingly.
Common questions
+What's a good LTV?
Depends on industry, but LTV / CAC of 3:1+ is the universal benchmark.
+Should I use revenue or profit?
Profit (gross margin). Revenue LTV overstates the picture.
+How many months of data do I need?
12 minimum, 24 ideal.
+Do I include refunds?
Yes — net revenue, not gross.
+Is LTV the same as CLV?
Yes — interchangeable terms.
What to do next
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