What is customer lifetime value?
Lifetime value
Lifetime value is what an average customer is worth across the entire relationship, not just their first purchase.
Formula
LTV = Order value × Purchases per year × Years retained × Margin
This is the number that sets your advertising ceiling. You can afford to spend more acquiring a customer than their first order is worth, provided they come back — and most businesses that conclude 'ads are too expensive' have only ever measured the first order.
Use gross profit rather than revenue. Comparing revenue-based lifetime value to acquisition cost makes the business look far healthier than it is, because it quietly ignores the cost of delivering the product.
If you're new and have no retention data, estimate conservatively — one year rather than a hopeful five — and revise once real repeat-purchase data exists. An optimistic lifetime value is the most common way businesses talk themselves into overspending.