Customer lifetime value (LTV) = average order value x orders per year x average customer lifespan in years x gross margin. Use it to set your allowable acquisition cost: many brands aim for an LTV to CAC ratio of about 3:1, and want to recover acquisition cost within the first one or two orders.
The formula
LTV = AOV x purchase frequency x lifespan x margin. Example: $60 x 2.2 orders a year x 2 years x 60% = $158 of lifetime gross profit.
Turn LTV into an acquisition budget
| LTV (gross profit) | Target ratio | Allowable CAC |
|---|---|---|
| $158 | 3:1 | $53 |
| $158 | 2:1 | $79 |
The cash flow catch
LTV is earned over time, but ads are paid today. If you set CPA based on LTV, make sure you can fund the gap until repeat orders arrive. Payback within one or two orders is a sensible guardrail for small brands.
How to raise LTV
- Replenishment emails timed to product usage
- Subscriptions for consumables
- Cross-sell to a second product category
- A post-purchase experience that teaches results
Lifetime value calculator
Frequently asked questions
What is a good LTV to CAC ratio?
3:1 is a widely used benchmark, meaning a customer generates three times their acquisition cost in gross profit over their lifetime.
Should I use revenue or profit for LTV?
Use gross profit. Revenue-based LTV overstates what you can afford to spend.
How do I find my repeat purchase rate?
Shopify's customer reports show returning customer rate and order counts per customer.
Written by Shimeez Bok, founder of Growth Alchemy, an ecommerce growth studio in Auckland, New Zealand.
