LTV (Customer Lifetime Value)

Customer Lifetime Value (LTV) estimates the total revenue a business expects to generate from a customer over the entire duration of their relationship with the brand. It is one of the most important metrics for understanding long-term growth, profitability, and retention.

Rather than focusing on a single purchase, LTV looks at the cumulative value of repeat purchases, engagement, and loyalty over time.

How LTV Is Calculated

There are multiple ways to calculate LTV depending on business model and data maturity. A common e-commerce formula is:

LTV = Average Order Value (AOV) × Purchase Frequency × Customer Lifespan

Example:
If a customer spends an average of $60 per order, purchases 4 times per year, and remains a customer for 3 years, their LTV is $720.

More advanced models may also factor in gross margin, churn rate, or cohort-based behavior.

Why LTV Matters

LTV helps businesses:

• Set sustainable customer acquisition budgets
• Measure the effectiveness of retention strategies
• Forecast long-term revenue and growth
• Understand which customer segments are most valuable

A strong LTV indicates healthy customer relationships and repeat purchasing behavior.

LTV vs CAC

LTV is most powerful when analyzed alongside Customer Acquisition Cost (CAC).

A common benchmark is:

• LTV ≥ 3× CAC

If CAC approaches or exceeds LTV, growth becomes unprofitable. Improving LTV allows brands to scale acquisition more confidently.

What Impacts LTV

Key factors that influence LTV include:

• Average order value (AOV)
• Purchase frequency
• Retention and churn rates
• Product quality and assortment
• Customer experience and support

Even small improvements in retention or purchase frequency can significantly increase LTV.

How to Increase LTV

Brands increase LTV by focusing on long-term customer engagement, including:

• Lifecycle email and SMS campaigns
• Personalized product recommendations
• Loyalty and rewards programs
• Post-purchase education and follow-ups
• Subscription or replenishment options

Retention-focused strategies typically have a higher ROI than acquiring new customers.

LTV in E-commerce and SaaS

In e-commerce, LTV reflects repeat purchase behavior and brand loyalty.

In SaaS, LTV is often calculated using average revenue per user (ARPU) and churn rate. While formulas differ, the core concept remains the same: maximizing long-term customer value.

Limitations of LTV

While powerful, LTV has limitations:

• It relies on assumptions about future behavior
• It may vary significantly across customer cohorts
• Poor data quality can skew results

For best results, LTV should be reviewed regularly and segmented by channel, cohort, or customer type.

Why LTV Matters

LTV helps businesses:

• Set acquisition budgets
• Measure retention success
• Forecast long-term growth