What Is LTV (Customer Lifetime Value)? Formula, Examples, LTV:CAC Ratio and How to Increase It

LTV (lifetime value), also called CLV or CLTV (customer lifetime value), is the total revenue (or better, gross profit) a business can expect from a customer over the entire relationship. A simple version is average order value × purchase frequency × customer lifespan. LTV tells you how much you can afford to spend to acquire a customer, which customers are most valuable, and whether your growth is profitable.

LTV formulas

1. Simple LTV (revenue)

LTV = Average order value × Purchases per year × Years as a customer

Example: a café customer spends $6 per visit, visits 80 times a year, for 3 years → 6 × 80 × 3 = $1,440.

2. Margin-based LTV (recommended)

LTV = Average order value × Purchase frequency × Lifespan × Gross margin %

With a 65% margin: $1,440 × 0.65 = $936 gross profit.

3. Subscription LTV (using churn)

LTV = (Average revenue per account per month × Gross margin %) ÷ Monthly churn rate

Example: SaaS at $100/month, 80% margin, 4% monthly churn → (100 × 0.8) ÷ 0.04 = $2,000.

4. Cohort/predictive LTV

More accurate: track actual cumulative revenue per customer cohort over time, or use predictive models (machine learning) that estimate future spend per customer.

What is LTV:CAC?

CAC (customer acquisition cost) = total sales and marketing spend ÷ new customers acquired.

LTV:CAC ratio compares value to cost:

• Below 1:1: losing money on each customer
• Around 3:1: a commonly cited healthy benchmark for many businesses
• Much higher than 5:1: possibly under-investing in growth

Also watch CAC payback period: months of gross profit needed to recover CAC.

What is a good LTV?

There's no universal number; it depends on industry and costs. What matters:

• LTV comfortably exceeds CAC
• LTV is growing over time
• High-LTV segments are identified and targeted

How to calculate LTV from your data

1. Export customers and orders from your store, CRM or billing system
2. Calculate average order value (revenue ÷ orders)
3. Calculate purchase frequency (orders ÷ unique customers per period)
4. Estimate lifespan (average active period, or 1 ÷ churn rate)
5. Apply gross margin
6. Segment by channel, product, region and cohort

A dashboard that updates automatically makes LTV a living metric rather than a one-time spreadsheet (see What is business intelligence? and How to analyze data).

12 ways to increase customer lifetime value

1. Improve onboarding so customers get value fast
2. Excellent customer service (see How AI can improve customer experience)
3. Loyalty and rewards programmes
4. Subscriptions and memberships for repeat purchases
5. Cross-sell and upsell relevant products
6. Personalised email and WhatsApp follow-ups (see How to write a newsletter)
7. Reduce churn with proactive check-ins and usage alerts
8. Win-back campaigns for lapsed customers
9. Bundles and higher-value packages
10. Raise prices with added value
11. Community and education
12. Acquire better-fit customers (channels with higher LTV)

LTV in marketing decisions

• Set maximum CAC and bids for ads by channel
• Optimise ads for high-value customers, not just cheap conversions
• Prioritise retention investments
• Identify best customer profiles for targeting (see What is account-based marketing?)

Frequently asked questions

What is LTV?

Customer lifetime value: the total revenue or gross profit a business expects from a customer over the full relationship.

How do you calculate LTV?

Multiply average order value by purchase frequency and customer lifespan, then by gross margin. For subscriptions, divide monthly gross profit per customer by monthly churn rate.

What is a good LTV to CAC ratio?

Around 3:1 is a common benchmark, meaning a customer's lifetime value is about three times what it cost to acquire them.

What is the difference between LTV and CLV?

They're the same concept; LTV, CLV and CLTV are different abbreviations for customer lifetime value.

Why is LTV important?

It shows how much you can spend to acquire customers, which customers are most valuable and whether growth is profitable.

How can I increase LTV?

Improve onboarding and service, add loyalty programmes and subscriptions, cross-sell and upsell, personalise follow-ups and reduce churn.