What is LTV?
LTV, or customer lifetime value, is the total profit one customer is worth across every order they place with you, rather than the value of a single sale.
Formula
LTV = average order value × orders per customer × contribution margin
Worked example, not a result
Two years of orders from one customer
Say a store looks at customers who first bought two years ago and finds that the average one placed 3 orders in that time, with an average order of 90. That is 270 in revenue per customer.
Apply a contribution margin of 52 percent and the store keeps 140.40 from that customer over two years. If it costs 55 in marketing to acquire someone, the customer leaves 85.40 behind after paying for their own acquisition.
The number changes the decision immediately. Judged on the first order alone, paying 55 to win a 90 order looks tight. Judged across the full two years, it looks like a purchase worth repeating as often as the store can afford.
These numbers are made up to show the method. Your own order counts, margins and time window will be different, and the honest version uses a period you actually have data for.
Why it matters
LTV is the number that decides how much a store is allowed to spend to grow. Without it, every acquisition decision is judged on a single order, and stores that could profitably outbid everyone in their category talk themselves into staying small.
It is built directly from three of the four levers. Average order value sets the size of each purchase, repeat purchases set how many there are, and margin decides how much of that revenue the business actually keeps. The visitors lever then spends against the result.
For a store owner the practical use is a ceiling and a priority. The ceiling is what you can pay to acquire a customer and still come out ahead over a defined period. The priority is which lever to work on next, because if orders per customer is close to one, the fastest route to a bigger business is usually a reason to come back rather than another campaign.
Common mistakes
- Calculating LTV on revenue instead of contribution. A lifetime revenue figure looks impressive and tells you nothing about how much you can afford to spend.
- Using a lifetime that has not happened yet. Projecting years of orders from a few months of data produces a number that justifies any budget, which is exactly why it is dangerous.
- Averaging every customer together. A store usually has a small group of frequent buyers and a long tail who bought once, and the blended average describes neither of them.
- Forgetting returns, refunds and discounts. Each one takes money back out of the lifetime, and stores with generous return policies overstate LTV badly if they skip this.
Related terms and answers
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