Term · Marketing & analytics
LTV (customer lifetime value)
LTV — customer lifetime value (also CLV) — estimates how much a customer is worth to a business over the entire relationship, not just the first purchase. It is best calculated with gross profit rather than revenue.
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Explained
Simple formulas
For repeat purchases:
LTV = average order value × gross margin × average number of purchases per customer
For subscriptions:
LTV = average monthly revenue per customer × gross margin ÷ monthly churn rate
Use your own data; industry benchmarks rarely apply to a specific business.
Why it matters
- Acquisition budgets: if customers return, you can afford to spend more to acquire them. Compare with CAC.
- Channel quality: some channels bring customers who buy once; others bring loyal ones.
- Retention investment: improving retention raises LTV and often costs less than acquiring new customers.
- Segmentation: high-value customer groups deserve different service and offers.
Improving LTV
- Better onboarding and service.
- Relevant follow-up: reminders, complementary products, loyalty programmes.
- Subscriptions or packages where they fit.
- Reducing churn by spotting disengaged customers early.
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FAQ
Frequently asked questions
How do new businesses estimate LTV?
Start with conservative estimates — for example, first-year gross profit per customer — and update as history grows.
Should LTV use revenue or profit?
Profit (gross margin) gives a more honest basis for spending decisions.