What is customer lifetime value (LTV)?
Customer lifetime value (LTV) is the total worth of one customer over their entire relationship with your business. For unit economics and the LTV:CAC ratio, use gross-profit LTV — revenue minus the direct cost of serving that customer.
Revenue LTV = AOV × Purchases per year × Customer lifespan (years)
Gross-profit LTV = Revenue LTV × Gross margin %
How to calculate LTV (step by step)
- Find AOV — total revenue ÷ number of orders. Or use the AOV calculator directly.
- Determine purchase frequency — total orders ÷ unique customers in a year.
- Estimate customer lifespan — average time between first and last purchase, or 1 ÷ churn rate for subscriptions.
- Compute revenue LTV = AOV × purchases per year × lifespan.
- Apply gross margin — revenue LTV × gross margin % = gross-profit LTV. Use this for LTV:CAC comparisons.
Worked example: ecommerce DTC brand
With an $80 average order, 3 purchases per year, a 3-year lifespan, and 60% gross margin:
| Metric | Calculation | Result |
|---|---|---|
| AOV | Given | $80 |
| Purchases per year | Given | 3 |
| Customer lifespan | Given | 3 years |
| Total orders | 3 × 3 | 9 orders |
| Revenue LTV | $80 × 9 | $720 |
| Gross margin | Given | 60% |
| Gross-profit LTV | $720 × 60% | $432 |
The customer is worth $432 in real money — not $720. That $432 must cover CAC, overhead, and profit. If CAC is $150, the LTV:CAC ratio is 2.9:1 (borderline healthy). If CAC is $100, ratio is 4.3:1 (solid).
Worked example: B2B SaaS (MRR method)
For subscription businesses, LTV is often computed differently — using MRR and churn rate:
| Metric | Value |
|---|---|
| Monthly revenue per customer (MRR) | $200 |
| Gross margin | 85% |
| Monthly gross profit | $170 |
| Monthly churn rate | 3% |
| Average customer lifespan | 33.3 months (1 ÷ 0.03) |
| Gross-profit LTV | $5,667 ($170 × 33.3) |
The subscription model with low churn produces a far higher LTV than the ecommerce model even at a similar price point — because the customer relationship is continuous rather than episodic.
Why gross-profit LTV matters
Revenue LTV overstates value — a customer who generates $720 in sales but costs $500 to fulfill is worth $220, not $720. Investors and the LTV:CAC framework use gross-profit LTV because it reflects money you can actually reinvest in growth. If you already know your AOV, plug it here with realistic retention assumptions.
SaaS vs. ecommerce LTV
Ecommerce often models LTV from repeat purchase frequency and lifespan. SaaS may use monthly recurring revenue × average customer lifetime in months × gross margin instead — the logic is the same: total gross profit per customer. Subscription businesses with low churn can have very high LTV even at modest monthly prices.
How to improve LTV
- Increase AOV: upsells, cross-sells, bundles, and higher prices.
- Increase purchase frequency: loyalty programs, replenishment reminders, seasonal campaigns.
- Extend lifespan: better onboarding, customer success, win-back campaigns for churned customers.
- Improve margin: negotiate COGS, shift mix to higher-margin products.
Use LTV next to CAC
LTV alone doesn't tell you if growth is healthy. Divide gross-profit LTV by your CAC to get the LTV:CAC ratio. Below 3:1 usually means fix economics before scaling; above 5:1 may mean you're under-investing in acquisition. Not sure whether to track CAC or CPL at the top of funnel? See CAC vs CPL for the difference.