Work out how much profit an average customer brings in over their whole relationship with you, and compare it with what it costs to win them.
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The formula
LTV = average order value × purchases per year × gross margin × customer lifespan (years)
If you know your yearly churn rate instead, lifespan = 1 ÷ churn. For example, 25% churn means customers stay about 4 years on average.
Worked example
| Value | |
|---|---|
| Average order value | £45 |
| Purchases per year | 4 |
| Revenue per year | £180 |
| Lifespan | 3 years |
| Lifetime revenue | £540 |
| Gross margin | 40% |
| LTV (gross profit) | £216 |
| CAC | £40 |
| LTV:CAC | 5.4:1 |
What’s a good LTV:CAC ratio?
| Ratio | What it means |
|---|---|
| Below 1:1 | You lose money on each new customer |
| 1:1 to 3:1 | Acquisition may be too expensive |
| 3:1 to 5:1 | A common healthy benchmark |
| Above 5:1 | You may be able to spend more to grow faster |
CAC payback is how many months of gross profit it takes to earn back the cost of winning a customer. Shorter is better for cash flow.
Frequently asked questions
How do you calculate customer lifetime value?
Multiply average order value by purchases per year, gross margin and the number of years a customer stays.
Should LTV use revenue or profit?
Profit (gross margin) is more useful, because it shows what you can afford to spend on acquisition.
What is a good LTV:CAC ratio?
Around 3:1 is a common benchmark.
How can I increase LTV?
Improve retention, encourage repeat purchases with email, raise average order value and reduce churn.
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