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, which is the usual minimum. The same page works out that CAC and the AOV feeding it.
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, which is modest over three years and substantial over ten. CAC has its own trap, and it is timing. Spend in January often wins customers in March, so dividing one month spend by the same month customers is noisy at best; a rolling three-month window smooths it. The other judgement there is which customers count — including organic arrivals makes CAC look better but makes it useless for deciding how much more to spend, since organic arrivals do not scale with budget. Average order value sits underneath both and is the cheapest lever of the three, because the extra revenue costs nothing to acquire: raising AOV ten per cent through bundling, a free-shipping threshold or a well-placed upsell drops straight to contribution, whereas winning ten per cent more customers costs ten per cent more acquisition spend. The caveat is that averages hide distributions, so the median order value is worth watching alongside the mean.
What people use it for
- Setting a maximum acquisition cost
- Justifying a retention programme
- Comparing customer segments by value
- Modelling the effect of reducing churn
- Comparing acquisition cost across channels
- Reporting unit economics to a board
- Deciding whether to increase ad budget
- Tracking whether merchandising changes are working
- Setting a free-shipping threshold
- Watching average basket size after a pricing change
- Setting a target acquisition cost for one campaign
- Feeding an average order value into the lifetime value model
- Comparing average order value between channels or campaigns
Questions
Average order value × orders per year × years retained × gross margin, and it is written CLV as often as LTV. Skipping the margin term overstates it badly.
Three to one is the usual benchmark. Below one you lose money on every customer; far above three often means you are underspending on growth.
Total sales and marketing cost divided by the number of new customers won in the same period.
Average order value. Total revenue divided by the number of orders in the same period.
How long it takes the customer to repay their acquisition cost. Under twelve months is comfortable for most businesses.
Profit. A revenue LTV compared against a real CAC is a meaningless ratio.
One divided by the annual churn rate. Twenty per cent annual churn implies a five-year average lifespan.
For a true figure, yes. Media-only CAC is useful for channel comparison but understates what a customer really costs.
Include them for a blended CAC, exclude them for a paid CAC. The paid figure is the one that tells you what more budget will cost.
There is no absolute answer; it only means something against lifetime value. Aim for LTV at least three times CAC.
Usually a timing mismatch between spend and conversion. A rolling three-month window smooths it.
Bundles, volume discounts, a free-shipping threshold above the current AOV, and relevant upsells at checkout.
Only if every customer orders once. Revenue per customer is AOV times orders per customer.
Be consistent. Most shops use ex-tax merchandise value, excluding shipping, so the figure tracks merchandising rather than postal rates.
Averages are pulled by outliers. Check the median too: a few huge orders can mask a falling typical basket.