LTV

What This Page Answers

LTV, or lifetime value, estimates how much revenue or contribution a customer produces over their relationship with the business. LTV helps decide how much you can afford to spend to acquire a customer, but it must be handled carefully.

Basic Formula

A simple revenue LTV formula:

LTV = average order value x purchase frequency x customer lifespan

A better acquisition formula uses contribution, not revenue:

Contribution LTV = customer revenue x contribution margin over time

Why LTV Matters

LTV affects:

  • CAC tolerance

  • Payback period

  • ROAS targets

  • Budget allocation

  • New customer acquisition strategy

  • Retention and lifecycle investment

A business with strong repeat purchase economics can sometimes accept lower first-order ROAS.

LTV Risks

LTV can be dangerous when it is inflated. Common mistakes:

  • Using revenue LTV instead of contribution LTV.

  • Assuming new paid customers behave like old organic customers.

  • Ignoring churn or refunds.

  • Using long payback windows that strain cash flow.

  • Applying average LTV to every channel equally.

  • Letting speculative future value justify weak acquisition.

Cohort Thinking

Measure LTV by cohort:

  • Acquisition month

  • Channel

  • Campaign type

  • Product purchased

  • Geography

  • New vs returning customer

  • Discount vs full-price purchase

Paid customers from one channel may have different retention than customers from another.

Practical Rule

Use LTV to expand acquisition only when retention and payback evidence are strong enough. Do not use optimistic LTV to excuse poor unit economics.