Short answer
Customer lifetime value (LTV, sometimes CLV or CLTV) is how much a typical customer is worth to you over their entire relationship with your store, not just their first order.
The simple ecommerce version:
LTV = average order value × orders per year × years as a customerThe more useful version uses profit instead of revenue:
LTV (profit) = average order value × gross margin × orders per year × years as a customerWhy it matters
LTV tells you how much you can afford to spend to get a customer. On its own it's a nice number. Next to CAC, it's a decision:
LTV : CAC ratio = LTV ÷ CAC- Below 1: every new customer loses money. More ads mean bigger losses.
- Around 3: a common rule of thumb for healthy growth, borrowed from subscription businesses.
- Way above 3: you might be under-spending on growth.
The ratio is only as honest as the LTV behind it. Revenue-based LTV makes everything look three times healthier than it is.
Example
Illustrative numbers. A skincare store's typical customer:
| Input | Value |
|---|---|
| Average order value | $60 |
| Gross margin | 50% |
| Orders per year | 3 |
| Years as a customer | 2 |
LTV (revenue) = $60 × 3 × 2 = $360
LTV (profit) = $60 × 0.5 × 3 × 2 = $180With a CAC of $50, the profit-based ratio is 3.6. Good. Using revenue LTV, the store would think it's 7.2 and could happily double its ad budget into a wall.
Often confused with
- AOV (average order value): one order. LTV is all orders.
- Revenue LTV vs profit LTV: same name, very different number. Always ask which one a report uses.
- Predicted vs historical LTV: a young store doesn't have two years of data yet, so its LTV is a forecast. Treat it as one.