The formula
- Revenue LTV = AOV × orders per year × customer lifespan (years)
- Margin LTV = revenue LTV × gross margin
- LTV:CAC = margin LTV ÷ CAC
- CAC payback (months) = CAC ÷ (monthly gross margin per customer)
How to use it
- Take orders per year and lifespan from a cohort old enough to show them — customers acquired 12–24 months ago, not last month.
- Use margin LTV when you compare it with CAC. Revenue LTV overstates what a customer is worth by everything you pay to fulfil the orders.
- Calculate it per acquisition channel if you can: customers from different channels rarely repeat at the same rate.
Worked example
A $70 average order, 2.5 orders a year and a 2-year lifespan give $350 of revenue LTV. At a 60% gross margin that is $210. Against a $45 CAC the LTV:CAC ratio is 4.7× and the customer pays back their acquisition cost in about 5 months.
Questions
How do you calculate customer lifetime value?
Multiply average order value by orders per year and by the number of years a customer keeps buying. Multiply by gross margin to get the profit version.
What is a good LTV:CAC ratio?
It depends on your cash position and payback period. The ratio only says how many times a customer returns their acquisition cost; payback in months tells you how long your cash is tied up.
Should LTV use revenue or margin?
Margin, whenever you compare it with acquisition cost. Revenue LTV is useful for forecasting sales, not for deciding what you can pay for a customer.
Why does a blended LTV mislead?
It averages old loyal cohorts with new ones. A cohort view shows whether the customers you are buying now behave like the ones you bought a year ago.