LTV — customer lifetime value — is the total revenue a customer generates over the whole relationship with your business, not just their first purchase. A customer who pays $250 a month and stays two years has an LTV of $6,000, even though any single invoice looks modest.
It's the most consequential number in your acquisition math, because it answers the question every ad budget secretly hinges on: what can we afford to pay for a customer? Get LTV wrong and every downstream decision — bids, budgets, channels — inherits the error. This article covers the formulas and the one adjustment most people skip; our free ROAS & CAC Calculator is the interactive version of this article if you'd rather plug in your own numbers as you go.
How Do You Calculate LTV?
Pick the formula that matches how customers pay you — there are two, and they're both short:
- One-time and repeat purchases: LTV = average order value × the number of purchases over the customer's lifetime. A $120 average order bought five times over the relationship is a $600 LTV.
- Recurring revenue: LTV = monthly revenue per customer × average months retained. If you don't know retention directly, estimate it from churn: average months ≈ 1 ÷ monthly churn rate. At 4% monthly churn, that's 1 ÷ 0.04 = 25 months — roughly two years.
So a $200/month subscription with 4% monthly churn carries an LTV of $200 × 25 = $5,000. Simple — and, as written, still wrong for making ad decisions. One adjustment to go.
Why Margin-Adjusted LTV Is the Number That Matters
Because you cannot pay for ads with revenue you already spent delivering the product. Margin-adjusted LTV multiplies lifetime revenue by your gross margin — and it's the version every acquisition decision should use.
Take that $5,000 LTV. At a 60% gross margin, only $3,000 of it is actually available to cover acquisition, overhead, and profit. Judge your ad spend against the $5,000 and you'll systematically overpay for customers by two-thirds — a mistake that looks like growth right up until the cash runs out.
Every time someone quotes an LTV, ask: revenue or margin-adjusted? The gap between those answers is the gap between a funded growth plan and an expensive hobby.
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Why Does LTV Change Your Decisions?
Because it sets the ceiling on everything upstream. Three decisions move the moment you know your real LTV:
- Your maximum CAC. Divide margin-adjusted LTV by your target ratio — 3:1 is the common bar — and you have the most you should pay for a customer. A $3,000 LTV at 3:1 means a $1,000 CAC ceiling, which then cascades backward into a maximum cost per call, per lead, per click.
- Which channels live or die. A channel that looks expensive on first-purchase ROAS can be your best performer once lifetime value enters the math — and vice versa.
- Whether retention is a growth lever. It is. Two extra months of average retention raises LTV, which raises your affordable CAC, which unlocks bids and channels your competitors can't touch. Retention work often beats another round of CPL squeezing — and nobody's dashboard celebrates it.
What Are the Honest Caveats?
LTV is an estimate of the future dressed up as a metric — treat it with matching humility.
The averages lie a little. A blended LTV across all customers hides the fact that customers from different channels, offers, and time periods behave differently. When you can, use cohorts: measure the lifetime value of customers acquired in a given month or from a given channel, and watch how it matures. Cohort LTV from a channel is the number that should set that channel's bids — not the company-wide average.
And recompute it. Churn drifts, pricing changes, product improves. An LTV calculated once and laminated is a souvenir, not a decision tool.
Finally, beware the optimistic LTV that quietly authorizes runaway spend. If the estimate assumes customers stay three years, your ad budget is a bet on year three arriving. Cash-constrained businesses often cap the horizon — count only the first 12 or 24 months of value — trading a smaller LTV for one they'd actually stake the bank balance on.
Try It: Your LTV, Max CAC, and Verdict in Two Minutes
The free ROAS & CAC Calculator runs everything above live:
- Pick your funnel type — lead gen or ecommerce — so the inputs match your business.
- Enter customer value, margin, and your funnel numbers — it computes margin-adjusted LTV automatically, so the flattering revenue version never sneaks into your decisions.
- Read the outputs — your LTV:CAC ratio, the maximum CAC your economics support, and the bid ceilings that flow backward from it.
It also highlights the biggest lever in your funnel — and retention is a more frequent winner than most people expect. No signup, no email gate — just the math, computed correctly. If your LTV says you can afford customers your campaigns aren't finding, that's exactly the problem we fix — as a Google Partner managing roughly $10M in ad spend, it's the one we see most.
Frequently Asked Questions
What is LTV?
LTV (customer lifetime value) is the total revenue a customer generates over the whole relationship with your business — not just the first purchase. For recurring revenue, it's monthly revenue × average months retained; for repeat purchase, average order value × lifetime purchases.
How do you calculate LTV for a subscription business?
Multiply monthly revenue per customer by average months retained, estimating retention as 1 ÷ monthly churn — at 4% monthly churn, 1 ÷ 0.04 = 25 months. Then multiply by gross margin for the version that should drive acquisition decisions.
What is a good LTV?
There's no universal good LTV — it only means something relative to your customer acquisition cost. The common bar is a 3:1 ratio of margin-adjusted LTV to CAC: a customer should be worth roughly three times what they cost to acquire.