How to calculate customer LTV (Lifetime Value)?

LTV (Lifetime Value) measures the revenue or profit a customer generates over the entire duration of their relationship with your store. It is a strategic indicator that helps determine how much you can invest to acquire a new customer (CAC), assess the health of your customer base, and guide retention decisions.

The basic formula is: LTV = Average order value × Purchase frequency × Customer lifespan. AOV is the average amount spent per order. Purchase frequency is the number of orders per year. Customer lifespan is the average number of years a customer remains active. For more accurate calculation in e-commerce, the cohort-based approach is often used: tracking cumulative revenue of a group of customers acquired in the same period.

Gross LTV uses revenue, while net LTV deducts variable costs (COGS, shipping, transaction) to provide gross profit per customer. Net LTV is more reliable to compare with CAC. The LTV:CAC ratio is a fundamental metric: a ratio above 3:1 indicates healthy acquisition, between 1:1 and 3:1 suggests fragile business, and below 1:1 means you lose money on each customer.

To calculate a meaningful LTV, analyze by monthly or quarterly cohort to identify trends. Segment by acquisition channel (SEO, Meta Ads, Google Ads) to see which sources bring the most profitable customers long term. LTV at 30, 90 and 365 days is particularly useful to steer your ad campaigns with a clear time horizon.