Why LTV matters
LTV decides how much you can afford to pay to acquire a customer. Without an LTV view, CAC is a number with no context, you cannot tell whether €60 to acquire a customer is a steal or suicidal.
LTV is also the metric that exposes whether your growth is real. A business growing through paid acquisition with flat or declining LTV is buying revenue that will not repeat. A business with rising LTV can scale paid spend with confidence.
How LTV is calculated
The simplest formula:
LTV = AOV × Purchase Frequency × Customer Lifespan
Better, cohort-based approach: track how much actual customers from January 2025 spent over the next 6, 12, 24 months, and extrapolate. Real data beats formulas, especially for businesses with seasonality or product-mix shifts.
Two important variants:
- Revenue LTV, top-line revenue per customer. Easy to track, but doesn’t account for COGS, returns, or fulfillment.
- Contribution-margin LTV, revenue LTV × contribution margin. This is the number that actually compares to CAC.
LTV time horizons
Different decisions need different LTV windows:
- 3-month LTV, for paid-acquisition payback math. If you need to pay off CAC in 90 days, this is your ceiling.
- 12-month LTV, for budget and scaling decisions.
- Lifetime LTV, for board reporting and total business valuation.
A €40 CAC paying back in 6 months from a customer with €300 lifetime value is healthy growth. The same €40 CAC paying back in 30 days with €60 12-month LTV is fine but not exciting.
How to lift LTV
Three levers:
- Retention, keep customers around longer. Email, lifecycle marketing, product quality.
- Frequency, buy more often. Subscription, replenishment reminders, cross-sell.
- AOV, buy more per order. Bundles, upsells, loyalty tiers.
Retention is usually the highest-ROI lever because compounding lifetime extension multiplies every other dollar.
FAQ about LTV (Customer Lifetime Value)
How is LTV calculated?
The simplest formula is AOV × purchase frequency × customer lifespan. Cohort-based calculation (tracking actual customers over time) is more reliable than formulas.
What is a good LTV-to-CAC ratio?
3:1 is the rule of thumb. Below 1 means you are losing money per customer. Between 1 and 2 you cannot scale paid acquisition. Above 3 the unit economics are healthy.
What is the difference between revenue LTV and contribution-margin LTV?
Revenue LTV is the top-line revenue per customer. Contribution-margin LTV multiplies that by contribution margin. The second is the number that meaningfully compares to CAC.