LTV (Customer Lifetime Value)
Definition
The total gross profit you expect from a customer over the whole relationship. Compared to CAC, it tells you how much you can afford to spend to win a customer.
Want a deeper explanation?
Formula
LTV = Average Order Value × Gross Margin % × Average Number of Orders per CustomerLTV is what a customer is really worth to you. Basing it on gross profit rather than revenue keeps it honest, because revenue alone makes customers look far more valuable than they are.
Use real repeat purchase data where you have it, not hopeful assumptions. Watch for: an LTV to CAC ratio below about 2:1, which means you are spending close to everything a customer is worth just to get them.
Example
$60 AOV × 45% margin × 3 orders gives an LTV of $81, so a $40 CAC is a healthy 2:1 ratio.