Metrics

What Is LTV (Customer Lifetime Value) (Customer Lifetime Value)?

Customer Lifetime Value (LTV) is the total gross profit a customer generates across the length of their relationship with you. It's the ceiling of how much you can afford to spend to acquire them, and the number that decides whether your unit economics work.

Formula

LTV = Average Order Value × Purchase Frequency × Gross Margin × Retention Years

Worked example

A subscription brand: AOV $50, purchase frequency 4×/year, gross margin 60%, average customer lifespan 3 years. LTV = 50 × 4 × 0.60 × 3 = $360. If CAC is $90, LTV:CAC = 4 — healthy. Swap gross margin for revenue LTV ($50 × 4 × 3 = $600) and the ratio jumps to 6.7 — but that number is fiction; you can't spend revenue you never keep.

Benchmarks

SaaS: LTV = ARPU × Gross Margin ÷ Churn Rate.
DTC: cohort-based LTV over 12/24/36 months is standard.
Use gross-profit LTV, not revenue LTV. Revenue LTV overstates by (1 − margin) — usually 30–80%.

Why it matters

LTV is half of the unit-economics equation. Under-reporting churn or over-reporting AOV silently inflates LTV, which silently inflates the CAC ceiling, which silently loses money on acquisition. The compounding damage is real.

Common mistakes

1.Using revenue LTV instead of gross-profit LTV.
2.Extrapolating from 3-month cohorts. You have no idea what retention looks like at 24 months.
3.One blended LTV. Segment by channel + cohort + product line.