LTV calculator
The 3:1 rule of thumb exists because lifetime value is a forecast and acquisition cost is a fact. You pay the CAC today; the LTV arrives over years, if the customer behaves as expected, if you stay in business, and if churn does not rise. A 3:1 ratio gives enough room for that forecast to be wrong by a third and still leave a business. At 1:1 you are buying revenue at cost, and at anything below it you are paying customers to leave.
Lifetime value is average order value times orders per year times customer lifespan, times gross margin. A 50 order four times a year for three years at 50% margin gives 300 of lifetime gross profit — a 3:1 ratio against a 100 acquisition cost.
How to calculate lifetime value
Two conventions make published LTV figures hard to compare. The first is whether margin is applied: a revenue-based LTV is double a margin-based one at 50% margin, and companies quoting the bigger number rarely say which they used. The second is discounting: money arriving in year three is worth less than money today, and a rigorous LTV discounts future contribution back to present value. For a business with a three-year lifespan the difference is modest; for a ten-year subscription business it is substantial.
Questions
Average order value × orders per year × years retained × gross margin. Skipping the margin term overstates it badly.