Customer lifetime value (LTV) is the total gross profit a customer brings you over the whole relationship. The simple formula is average order value × purchases per year × years as a customer × gross margin. Compare it with your customer acquisition cost (CAC) to know how much you can afford to spend on ads, offers and follow-up.
- Calculate LTV on gross profit, not revenue, or you will overspend on ads.
- Simple formula: average order value × purchases per year × years retained × gross margin.
- Compare LTV with CAC. If one customer is worth $1,500 in profit, a $300 cost per customer is affordable.
- Use LTV to set ad targets, pick which customers to find more of, and justify retention work.
What is customer lifetime value?
Customer lifetime value, also called LTV or CLV, is how much a customer is worth to your business over the entire time they buy from you. Not the first order. All of them.
It matters because most marketing decisions are really one question: how much can I spend to get a customer? If you only look at the first sale, you will underspend on customers who come back for years and overspend on customers who buy once and disappear.
How do you calculate customer lifetime value?
You do not need a data team. Start with the simple version and refine later.
The simple LTV formula
LTV = average order value × purchases per year × years as a customer × gross margin.
- 1Average order value: total revenue divided by number of orders over the last 12 months.
- 2Purchases per year: number of orders divided by number of unique customers over the same period.
- 3Years as a customer: how long a typical customer keeps buying. If you lose 25% of customers a year, the average is about 1 ÷ 0.25 = 4 years.
- 4Gross margin: the share of revenue left after the direct cost of delivering the product or service.
Worked example: a coffee subscription
Average order $30, 10 orders a year, customers stay 2 years, 60% gross margin. LTV = 30 × 10 × 2 × 0.60 = $360 in gross profit.
Worked example: an HVAC company
A maintenance plan customer spends $400 a year on tune-ups and repairs, stays 6 years, and every few years buys a bigger job. Say the total revenue over the relationship is $8,000 at a 45% margin. LTV = $3,600 in gross profit. That changes how much a lead from Google is worth.
LTV formulas compared
| Method | Formula | Best for |
|---|---|---|
| Historical | Total gross profit from a group of customers ÷ number of customers | Businesses with 2+ years of data |
| Simple predictive | AOV × purchases per year × years retained × margin | Most small businesses, quick estimates |
| Subscription | (Monthly revenue per customer × margin) ÷ monthly churn rate | Memberships, SaaS, service plans |
| Cohort | Track gross profit per customer by month they joined | Seeing whether new customers are better or worse than old ones |
For a subscription, if a member pays $100 a month at a 70% margin and 5% cancel each month, LTV = (100 × 0.70) ÷ 0.05 = $1,400.
What is a good LTV to CAC ratio?
Customer acquisition cost (CAC) is what you spend to win one new customer: ad spend plus sales and marketing costs, divided by new customers. LTV only means something next to CAC.
| LTV : CAC | What it usually means |
|---|---|
| Below 1 : 1 | You lose money on every customer |
| Around 1 : 1 to 2 : 1 | Thin. One bad month and you are underwater. |
| Around 3 : 1 | A common rule of thumb for a healthy business |
| 5 : 1 or more | Profitable, and possibly underinvesting in growth |
Treat 3 : 1 as a rule of thumb, not a law. A business with lots of cash and strong retention can run lower to grow faster. A business with slow payback should run higher. Also look at payback time: how many months until a customer’s profit covers what you spent to win them.
Why retention matters so much for LTV
These are long-standing benchmarks, not promises for your business. The logic still holds: in the LTV formula, years as a customer multiplies everything else. Keeping customers one year longer can be worth more than any ad optimization.
How to use LTV in your marketing
1. Set your maximum cost per customer
Decide what share of LTV you are willing to spend to win a customer. If LTV is $1,500 in gross profit and you target 3 : 1, your maximum CAC is $500. Divide by your close rate to get your maximum cost per lead. With a 25% close rate, you can pay up to $125 per lead.
2. Tell your ad platforms what a customer is worth
- In Google Ads, assign conversion values that reflect expected profit, not just the first sale, and use value-based bidding like Target ROAS.
- Google’s customer lifecycle goals can bid higher for new customers, and the High Value New Customer mode lets you define which customers are worth more based on your own data.
- In Meta, upload a list of your best customers as a Custom Audience and build lookalikes from it, instead of from everyone who ever bought.
- Send offline conversions or CRM stages back to both platforms so they learn which leads become valuable customers.
3. Find more of your best customers
Split LTV by acquisition channel, service and customer type. You will often find that one channel brings cheaper leads but lower-value customers, and another costs more per lead but pays back several times over. Move budget toward the second.
4. Invest in retention and repeat business
- A follow-up sequence after the first purchase or job.
- Maintenance plans, memberships or subscriptions that turn one-time buyers into recurring ones.
- Review requests and referral offers to happy customers.
- Win-back campaigns to customers who have not bought in a year.
How to calculate LTV for a service or lead-gen business
If you sell jobs instead of products, the formula is the same but the inputs come from your CRM, not a cart. Average job value comes from closed invoices. Repeat rate comes from how many customers book a second job, a maintenance visit or a renewal. Do not forget referrals. A customer who sends you a neighbor is worth more than one who does not, even if you only count it roughly.
Then work backward to lead cost. Suppose your LTV is $2,000 in gross profit, you aim for 3 : 1, and one in five leads becomes a customer. Your maximum CAC is about $667, and your maximum cost per lead is about $133. If your ads bring leads at $80, you have room to scale. At $180, fix the close rate or the offer before you add budget.
Common LTV mistakes
- Using revenue instead of gross profit.
- Averaging everyone together. Your best 20% of customers may be worth many times the rest.
- Assuming a lifespan you have not seen. A two-year-old business cannot prove a 10-year customer life.
- Leaving out refunds, discounts and the cost of serving the customer.
- Calculating it once. Recalculate every quarter, and by cohort, to see whether new customers are as good as old ones.
Where to get the data
Your e-commerce platform, invoicing tool or CRM already has most of what you need: orders, dates and customer IDs. Export 12 to 24 months of transactions, group them by customer and run the simple formula in a spreadsheet. If your CRM does not link payments to contacts, fix that first. It is the foundation for every number in this article.
Frequently asked questions
Multiply average order value by purchases per year, by the number of years a typical customer stays, and by your gross margin. That gives the gross profit a customer brings you over their lifetime.
Gross profit. Revenue LTV makes customers look more valuable than they are and leads to overspending on ads.
Around 3 : 1 is a common rule of thumb. Below 1 : 1 you lose money on each customer. Well above 5 : 1 you may be growing slower than you could.
Use churn. If about 25% of customers stop buying each year, the average lifespan is about four years. Be conservative until you have real history.
It tells you the maximum you can pay per customer and per lead. You can also feed customer values and best-customer lists to the platforms so they bid for people likely to be worth more.
