LTV
lifetime valueLifetime value, LTV, tells you how much margin one customer produces over their entire relationship with you. It is the product of average order margin, purchase frequency and relationship length. LTV defines how much you can pay to acquire a customer.
Good to know
LTV changes the mathematics of marketing: if a customer buys four times on average, the first sale is allowed to be loss-making. In competitive markets the winner is often whoever can pay the most for acquisition, and that is whoever has the highest LTV. Its natural pair is CAC, the acquisition cost.
The sharpest picture comes from cohort analysis: follow customers who started in January as their own group. Cohorts reveal whether new relationships improve on old ones, which a single average never shows.
FORMULA
How lifetime value is calculated
The simplest form multiplies average order margin, yearly purchase frequency and relationship length.
LTV = order margin × purchases/year × years as customer
In subscription businesses LTV is monthly margin multiplied by the average subscription length.
EXAMPLE
One customer relationship produces 480 € of margin, so acquisition can cost far more than one sale’s margin.
PITFALLS
Two ways to misread lifetime value
LTV is computed from revenue
Revenue-based LTV licenses paying more for acquisition than margin can carry. Margin is the only honest base.
The average hides the segments
The best customer decile can produce half of all value. Without segmentation, marketing targets an average customer who does not exist.
A forecast is read as an actual
A three-year LTV forecast rests on assumptions that can fail. Separate realised value from forecast value in reporting.
FREQUENTLY ASKED
Frequently asked questions
What is a healthy LTV to CAC ratio?+
The common rule of thumb is at least 3:1. Below that, growth burns cash; clearly above 5:1 can mean you are investing too cautiously in acquisition.
How do I grow LTV?+
Increase purchase frequency and relationship length: newsletters, repeat-purchase campaigns and a good customer experience matter more than hunting new customers.
Why is LTV calculated from margin, not revenue?+
Revenue-based LTV overstates what you can spend on acquisition. Only margin pays the bills.
How do I estimate LTV without historical data?+
Start with a cautious assumption: order margin times two purchases a year times two years. Update the assumptions quarterly against actuals.
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Maintained by the VSCY editorial team · Updated 6 Aug 2026 · Part of the marketing glossary (99 terms)
