If you’re running a business or just trying to understand your customers better, one powerful number you should know is Customer Lifetime Value, or LTV.
It tells you this simple but important thing:
How much money a customer is worth to your business over time.
Let’s break it down in a fun, simple way!
Table of Contents
What is LTV?
LTV (Lifetime Value) is the total revenue you expect to earn from a customer during your entire relationship with them.
If a customer shops with you every month and sticks around for 3 years — that adds up!
Knowing your LTV helps you:
- Set a smart marketing budget
- Plan for growth and retention
- Understand which customers are most valuable
LTV Formula (Simple Version)
Here’s the basic formula:
LTV = Average Purchase Value × Purchase Frequency × Customer Lifespan
Example
Let’s say:
- Average purchase = $50
- Customer buys from you 5 times per year
- They stick around for 3 years
Plug into the formula:
LTV = $50 × 5 × 3 = $750
That means the customer is worth $750 to your business over their lifetime!
Bonus: LTV With Profit Margin
If you want to calculate LTV based on profits (not revenue), use:
LTV = (Average Purchase × Frequency × Lifespan) × Gross MarginLet’s say your gross margin is 60% (or 0.60):
LTV = $750 × 0.60 = $450So each customer brings $450 in profit.
Why LTV Matters
- Helps you figure out how much to spend on acquiring customers
- Shows how valuable loyal customers really are
- Encourages you to focus on retention and repeat business
Pro tip: If your customer acquisition cost (CAC) is higher than your LTV, you’re losing money!
Quick Recap
| Term | What It Means |
|---|---|
| Average Purchase | How much they usually spend |
| Purchase Frequency | How often they buy |
| Customer Lifespan | How long they stay with your business |
| Gross Margin | What you keep after costs (optional) |