What is Lifetime Value?
TL;DR
The total revenue a customer generates over their entire relationship with your business. LTV = Average Purchase Value × Purchase Frequency × Customer Lifespan. If Customer Acquisition Cost is $100 but LTV is $1,000, you can afford to spend more on acquisition. LTV justifies marketing investment and helps prioritize high-value customer segments.
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Frequently Asked Questions About Lifetime Value
How do I calculate lifetime value?
Basic formula: LTV = Average Purchase Value × Purchase Frequency × Average Customer Lifespan. A customer spending $100/order, 4x/year, for 5 years = $2,000 LTV. More sophisticated models include profit margins and discount rates.
Why is LTV important?
LTV determines how much you can spend to acquire customers profitably. High LTV justifies higher acquisition costs. LTV also helps identify which customer segments to prioritize, focus on attracting customers who'll be worth the most.
How do I increase lifetime value?
Increase purchase frequency (loyalty programs, email marketing), increase average order value (upsells, bundles), extend customer lifespan (great service, engagement), and add complementary products/services.
What's a good LTV:CAC ratio?
3:1 is a common benchmark, customers should generate 3x what you spent acquiring them. Below 1:1 means you're losing money per customer. Above 5:1 might mean you're underinvesting in growth.
How long does it take to calculate LTV accurately?
You need historical data on customer behavior, ideally several years. New businesses must estimate based on industry benchmarks or cohort analysis of early customers. Refine LTV calculations as you gather more data.
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