Customer lifetime value (LTV)
Customer lifetime value (LTV) is the total value a customer generates across every order they place over their whole relationship with a store. It is calculated as average order value × purchase frequency × customer lifespan, and ecommerce operators use it to set the ceiling on what they can afford to spend acquiring a customer.
| Variable | What it covers |
|---|---|
| AOV | Average order value - total revenue ÷ total orders. |
| Purchase frequency | Average orders per customer per year. |
| Customer lifespan | Average years a customer keeps buying before they lapse. Cap it with a window or a lapsed rule. |
Conventions differ on the basis. Most dashboards compute LTV on revenue, as above. Multiply by contribution margin % and you get Margin LTV - the version you can actually spend against, and the way we compute it.
Worked example
Example numbers. On revenue this customer looks worth A$540; in margin dollars - the pool acquisition, fixed costs and profit all draw from - they are worth A$243, and A$148 after the cost of winning them.
What is a good customer lifetime value?
There is no universal good LTV, because a dollar figure means nothing on its own. What it depends on: your contribution margin per order (which sets how much of LTV is spendable), your category's repeat cycle (consumables compound frequency; durables may never repeat), the window you cap lifespan at, and whether you computed it on revenue or margin. The honest way to judge yours is to compute Margin LTV and hold it against blended CAC - the free Margin LTV calculator does exactly that with your own numbers.
Customer lifetime value vs related metrics
| Metric | What it measures | How it differs from LTV |
|---|---|---|
| Margin LTV | Lifetime contribution margin per customer. | Strips landed COGS and variable costs from LTV - the spendable version. |
| Average order value (AOV) | Revenue per single order. | A one-order snapshot; LTV compounds AOV across frequency and lifespan. |
| LTV:CAC ratio | Lifetime value returned per acquisition dollar. | Divides LTV by CAC; LTV alone says nothing about what the customer cost. |
| CAC payback | Months to recover acquisition cost from contribution. | Answers when the money comes back; LTV answers how much in total. |
Common mistakes
- Computing LTV on revenue and spending against it. At a 40% contribution margin, a A$500 revenue LTV is A$200 of money you can actually deploy.
- Using one all-time average. It blends your oldest, most loyal cohorts with last month's, and inflates a number new acquisition spend will never reproduce. Compute it by cohort.
- Letting lifespan run unbounded. Cap it at a fixed window (12, 24 or 36 months) or a lapsed definition, or a projected tail ends up doing most of the work.
- Ignoring returns and discounts. LTV built on gross sales before returns overstates every ratio downstream of it.
- Treating the average customer as a real customer. Value concentration means a small slice of customers usually carries most of total LTV; the average describes almost nobody.
Customer lifetime value FAQ
Related
Blufire S4 Customer Value & Segmentation computes CLV on true contribution margin for every customer and rolls it into the margin-true RFM cube and Financial Buckets. The Math teaches the full method free.
Updated July 2026