What is LTV?
Lifetime value, the total contribution margin a customer generates across the whole of their relationship with your business.
LTV = AOV x Purchase Frequency x Gross Margin x Customer Lifespan
A worked example
A customer with an Rs 800 average order value who buys four times a year at 45 per cent margin, staying with you for two years, has an LTV of about Rs 2,880. Note that this is margin, not revenue. The revenue figure would be Rs 6,400 and using it would overstate what you can afford to spend on acquisition by more than double.
Why it matters
LTV determines what you can afford to pay for a customer, which makes it the most important number in any repeat-purchase business and the one most often estimated badly. Everything downstream (your ROAS target, your CAC ceiling, whether a channel is viable) depends on getting it roughly right.
The commonly cited benchmark is an LTV to CAC ratio of 3:1 or better. That is a reasonable target for a stable business, though early-stage brands frequently run closer to 1.5:1 or 2:1 deliberately, accepting thin returns now to build a customer base that pays later. What matters is that the choice is deliberate rather than accidental.
LTV also changes how you think about the first order. If a customer is worth Rs 2,880 over two years, losing money on their first purchase is not a problem. It is an investment, provided the repeat behaviour actually materialises. That last clause is where most LTV models fall apart.
The nuance most people miss
LTV calculations go wrong in two specific ways, both of them optimistic. First, they use revenue instead of contribution margin, which inflates the figure by a factor of two or three. Second, they project customer lifespan from too little data: a brand nine months old cannot credibly claim a two-year lifespan, because it has never observed one. Until you have genuine cohort history, use a conservative twelve-month LTV and revise it upward as real data arrives. In India there is a third correction: for cash-on-delivery-heavy businesses, base LTV on delivered orders, since undelivered orders generate cost without revenue.
Common mistakes
- Using revenue instead of contribution margin, which substantially inflates LTV
- Projecting customer lifespan from a period shorter than the lifespan being claimed
- Applying a single blended LTV across acquisition channels that produce very different customers
- Building an acquisition strategy on a predicted LTV that has not yet been observed in a real cohort