What is LTV? Customer lifetime value explained
Customer lifetime value (LTV, also called CLV) is the total revenue a customer is expected to generate over their whole relationship with your store. It shifts attention from a single sale to the value of keeping a customer coming back.
How LTV is calculated
The most common simple formula multiplies three averages:
LTV = average order value × purchase frequency × average customer lifespan
- Average order value = total revenue ÷ number of orders.
- Purchase frequency = number of orders ÷ number of unique customers, over a set period (for example, per year).
- Customer lifespan = how long, on average, a customer keeps buying.
Hypothetical example: customers spend $40 per order, order 3 times a year and stay for 2 years. LTV = $40 × 3 × 2 = $240.
Many teams multiply the result by gross margin to get a profit-based LTV, which is the figure that should be compared with what you spend to acquire a customer. Analytics tools also report an observed version: Google Analytics 4's Lifetime value metric shows the total revenue from purchases a user has actually made, net of refunds, rather than a forecast.
Why LTV matters
- Acquisition budgets. If a customer is worth $240 in revenue over their lifetime, you can judge what you can afford to pay to win one, after margin and costs.
- Retention focus. LTV grows when customers buy more often or stay longer, so loyalty programs, post-purchase emails and good service show up directly in the number.
- Segment comparison. LTV by acquisition channel or first product often reveals that the cheapest customers to win are not the most valuable ones.
Common mistakes
- Using revenue instead of margin when comparing LTV with acquisition cost.
- One average for everyone. A store-wide LTV hides big differences; cohort analysis and RFM segmentation show which groups drive it.
- Guessing lifespan. A young store has little history, so treat early LTV figures as estimates and revisit them as data accumulates.