How to Calculate LTV (Customer Lifetime Value)
Short answer: For most businesses, LTV = AOV × purchase frequency × customer lifespan × gross margin. For subscriptions, LTV = (monthly gross profit per customer) ÷ monthly churn rate. Always use gross profit, and pick a realistic lifespan you have data to support.
Method 1: The ecommerce / repeat-purchase formula
Use this when customers buy discrete orders over time:
- LTV = AOV × orders per year × lifespan (years) × gross margin
Worked example for an ecommerce store:
- Average order value: $60
- Orders per year: 4
- Average customer lifespan: 3 years
- Gross margin: 40%
- LTV = $60 × 4 × 3 × 0.40 = $288
That $288 is gross profit — the real amount available to cover acquisition and overhead. See what is AOV if you need to find your average order value first.
Method 2: The subscription / churn formula
Use this for SaaS, memberships, or any recurring-revenue model:
- Average lifespan (months) = 1 ÷ monthly churn rate
- LTV = monthly revenue per customer × gross margin × average lifespan
Worked example for a SaaS product:
- Monthly revenue per customer: $50
- Gross margin: 80%
- Monthly churn: 5% → lifespan = 1 ÷ 0.05 = 20 months
- LTV = $50 × 0.80 × 20 = $800
Notice how powerful churn is: cutting monthly churn from 5% to 2.5% doubles average lifespan to 40 months and doubles LTV to $1,600 — with no change to pricing or acquisition.
Step-by-step: gathering your inputs
- AOV — total revenue ÷ number of orders over a period
- Purchase frequency — total orders ÷ unique customers over the same period
- Lifespan — from cohort retention data; if you lack history, be conservative (1–2 years)
- Gross margin — (revenue − cost of goods sold) ÷ revenue
- Churn (subscriptions) — customers lost in a month ÷ customers at the start of the month
Turning LTV into an acquisition budget
Once you know LTV, your maximum sustainable CAC follows directly:
- Max CAC = LTV ÷ target LTV:CAC ratio
- Example: $288 LTV ÷ 3 = $96 maximum CAC
That $96 is the most you should pay, blended, to acquire a customer. Compare it to your actual CAC and check the gap with the LTV:CAC calculator. See the LTV:CAC ratio explained for how to read the result.
Don’t forget payback period
LTV tells you the lifetime value; it doesn’t tell you how long you wait to get your money back. A $96 CAC recovered over 18 months is very different for cash flow than one recovered in 2 months. Always pair LTV with CAC payback period.
Common mistakes
- Calculating LTV on revenue instead of gross profit. Overstates spending room by your entire cost of goods.
- Using an optimistic lifespan. If your business is 10 months old, you don’t yet have evidence for a 3-year lifespan. Use what your cohorts actually show.
- Blending very different customer segments. A single blended LTV can hide that one segment is wildly profitable and another loses money. Segment where it matters.
- Treating LTV as fixed. Retention, AOV, and margin all move LTV. Recalculate quarterly.
FAQ
What’s the difference between historic and predictive LTV?
Historic LTV sums the gross profit a customer has already generated. Predictive LTV forecasts future value using retention and purchase models. Start with historic; move to predictive once you have enough cohort data.
Should I discount future cash flows?
For most small businesses, no — it adds complexity for little benefit. Larger or finance-driven businesses sometimes apply a discount rate to distant cash flows, which lowers LTV slightly.
How often should I recalculate LTV?
Quarterly is a good cadence for most businesses, or whenever pricing, margin, or retention changes meaningfully.