Customer LTV Calculator
Estimate customer lifetime value on gross profit, and check it against your acquisition cost with the LTV:CAC ratio.
Short answer
LTV must be measured on gross profit, not revenue. $120 × 2.5 orders a year × 3 years is $900 of revenue but only $540 of gross profit at a 60% margin. Against a $90 CAC that is a 6:1 ratio — healthy, and a sign you could spend more.
Use the LTV Calculator below for your own numbers — it updates as you type.
Your numbers
Orders one customer places in a year — decimals are fine (2.5 = five orders every two years).
How long the average customer keeps buying before they lapse.
Revenue left after COGS, shipping and payment fees — LTV has to be built on this, not on revenue.
Total sales + marketing spend ÷ new customers won.
Gross profit lifetime value
Every $1 of acquisition returns $6.00 of gross profit. Above 5:1 usually means you are underinvesting rather than winning — at 3:1 you could afford $180.00 per customer.
- Average order value
- $120.00
- Orders per customer
- 7.50
- Revenue LTV
- $900.00
- Gross profit per order
- $72.00
- Gross profit LTV
- $540.00
- Customer acquisition cost
- −$90.00
- LTV:CAC ratio
- 6.00:1
- Verdict
- Above 5:1 — likely underinvesting in growth
- Payback
- 1.25 orders
- Year-1 profit after CAC
- $90.00
- Max affordable CAC (at 3:1)
- $180.00
A customer who spends $120 an order, buys 2.5 times a year, stays three years, and comes with a 60% gross margin is worth $900 in lifetime revenue — but only $540 in lifetime gross profit. The $540 is the real LTV. It is the only money that can pay for advertising, staff, software, and profit. Quote the $900 instead and you will approve a customer acquisition cost about 1.7× higher than the business can support. Against a $90 CAC, this customer returns a 6.0:1 LTV:CAC ratio and repays the acquisition spend in 1.25 orders — roughly six months.
That gap between $900 and $540 is the most common way a company talks itself into overspending. This guide covers both figures, the formula behind them, what a good LTV:CAC ratio actually is, why anything above 5:1 is usually bad news, and the cash-flow trap where a perfectly correct LTV still empties the bank account.
What is customer lifetime value (LTV)?
Customer lifetime value is the total value one customer produces across the entire relationship — not just the first order. It exists because acquisition is priced per customer while profit arrives per order. If you only ever compare the cost of winning a customer to the profit on their first purchase, you will systematically underinvest in acquisition and lose share to competitors who count the whole relationship.
There are two versions of the number and they are not interchangeable:
- Revenue LTV — total money the customer sends you.
- Gross profit LTV — what is left after the cost of goods, shipping, and payment fees that came with those orders.
Revenue LTV is the bigger, friendlier number, which is exactly why it ends up in board decks. It cannot pay for anything. When this guide says LTV without a qualifier, it means gross profit LTV.
The LTV formula
Three lines do all the work:
Revenue LTV = Average order value × Purchases per year × Customer lifespan in years
Gross profit LTV = Revenue LTV × Gross margin %
LTV:CAC ratio = Gross profit LTV ÷ CAC
Applied to the customer in the opening paragraph:
| Input | Value |
|---|---|
| Average order value | $120.00 |
| Purchases per year | 2.5 |
| Customer lifespan | 3 years |
| Gross margin | 60% |
| Customer acquisition cost | $90.00 |
| Output | Value |
|---|---|
| Orders per customer | 7.5 |
| Revenue LTV | $900.00 |
| Gross profit per order | $72.00 |
| Gross profit LTV | $540.00 |
| LTV:CAC ratio | 6.00:1 |
| Payback | 1.25 orders |
| Year-1 profit after CAC | $90.00 |
| Max affordable CAC at 3:1 | $180.00 |
Every figure in this guide comes from that same model, so you can reproduce any of them in the LTV Calculator by changing one input at a time.
Revenue LTV vs gross profit LTV
Gross margin is the entire difference between the two numbers, and it changes the answer far more than most people expect. Holding revenue LTV at $900 and moving only the margin:
| Gross margin | Revenue LTV | Gross profit LTV | LTV:CAC at $90 CAC | Max affordable CAC at 3:1 |
|---|---|---|---|---|
| 30% | $900.00 | $270.00 | 3.00:1 | $90.00 |
| 40% | $900.00 | $360.00 | 4.00:1 | $120.00 |
| 50% | $900.00 | $450.00 | 5.00:1 | $150.00 |
| 60% | $900.00 | $540.00 | 6.00:1 | $180.00 |
| 70% | $900.00 | $630.00 | 7.00:1 | $210.00 |
Two identical stores by revenue — one at a 30% margin and one at 70% — can afford CACs that differ by $120 per customer. The one working from revenue LTV cannot see that at all. It would look at $900 and, applying a 3:1 rule, authorise a $300 CAC. At a 30% margin the true ceiling is $90. That business would be paying more than three times what it can afford while believing it was following a conservative benchmark.
Use a real margin, not the one on your P&L summary. Gross margin in accounting often excludes outbound shipping and payment processing, and both come out of every order. Work out the honest figure with the Profit Margin Calculator, and if you sell on marketplaces, subtract platform fees too — the Marketplace Fee Comparison shows how much of a sale each channel keeps.
What is a good LTV:CAC ratio?
The convention is 3:1: three dollars of lifetime gross profit for every dollar spent acquiring the customer. The other two dollars go to overheads, product development, refunds, and profit. It is a rule of thumb, not physics, but it survives because it approximately reflects what is left after everything that is not cost of goods.
| LTV:CAC | CAC on a $540 LTV | Verdict | What it means |
|---|---|---|---|
| Below 1:1 | $600 | Below 1:1 — losing money | Every new customer makes you poorer. Scaling accelerates the loss. |
| 1:1 to 3:1 | $200 (2.70:1) | Under 3:1 — thin | Gross profit covers acquisition and little else. Fragile to any error. |
| 3:1 to 5:1 | $150 (3.60:1) | Healthy 3:1 or better | The working zone. Spend confidently and keep watching payback. |
| Above 5:1 | $90 (6.00:1) | Above 5:1 — likely underinvesting | You can afford more traffic than you are buying. |
A ratio between 1:1 and 3:1 is the most dangerous band, because nothing visibly breaks. Orders arrive, revenue grows, the ads dashboard looks alive. The margin is simply too thin to survive a supplier price rise, a bad quarter of returns, or a lifespan assumption that proves optimistic — and every one of those is likely over three years.
Why is a ratio above 5:1 a problem?
Because a very high ratio is a report on demand you did not buy. If a customer is worth $540 in gross profit and you are winning them for $90, you are running at 6:1 when you could pay up to $180 and still hold the 3:1 benchmark. The $90 of headroom on every customer is being left for a competitor.
Acquisition costs rise as you scale — the cheapest audiences are exhausted first, so the marginal customer always costs more than the average one. That is the point. A business that spends until it reaches 3:1 buys strictly more total profit than one that stops at 6:1, even though the second one has the prettier ratio. Ratio is an efficiency measure; total gross profit is the thing you actually bank.
Three honest exceptions. If you are cash-constrained, a high ratio may be the only affordable choice — see the cash-flow section below. If your lifespan estimate is unproven, a high ratio is a sensible safety margin. And if you are capacity-limited — a service business with a booked calendar — more customers do not help.
How much can you afford to pay for a customer?
Rearranging the benchmark gives a hard ceiling:
Max affordable CAC = Gross profit LTV ÷ 3
On $540 of lifetime gross profit that is $180 per customer. Nothing about that number involves your ad account — it comes entirely from the price, the margin, and how long people stay.
The useful part is that $180 translates all the way down the funnel into a bid. Each step divides by the conversion rate of the step below it:
| Step | Figure | Where it comes from |
|---|---|---|
| Gross profit LTV | $540.00 | AOV × orders × margin |
| Target LTV:CAC | 3:1 | Benchmark |
| Max CAC | $180.00 | $540 ÷ 3 |
| Landing page conversion rate | 2.5% | Analytics |
| Max cost per click | $4.50 | $180 × 2.5% |
| Click-through rate | 1.2% | Ads platform |
| Max CPM | $54.00 | $4.50 × 1.2% × 1,000 |
Now the number is something a media buyer can act on: bid up to $4.50 a click, and treat $54 CPM as the ceiling on placement costs. Work each step out on your own numbers with the CAC Calculator, the CPA Calculator, the Conversion Rate Calculator, the CPC Calculator, and the CPM Calculator. If you would rather express the ceiling as a return rather than a cost, the ROAS Calculator and the Breakeven ROAS Calculator run the same logic in the other direction.
One caution: max CAC is a customer ceiling, not an order ceiling. Paying $180 to acquire a customer whose first order yields $72 of gross profit means the first sale loses $108. That is fine if the relationship is real. It is a catastrophe if it is not.
How long does it take to pay back CAC?
Payback is the discipline that keeps LTV honest. Measured in orders:
Payback orders = CAC ÷ Gross profit per order
At $72 of gross profit per order:
| CAC | Payback in orders | Payback in years at 2.5 orders/yr |
|---|---|---|
| $36.00 | 0.50 | 0.2 |
| $72.00 | 1.00 | 0.4 |
| $90.00 | 1.25 | 0.5 |
| $144.00 | 2.00 | 0.8 |
| $180.00 | 2.50 | 1.0 |
| $360.00 | 5.00 | 2.0 |
The default customer breaks even inside their second order — about six months. Push CAC to the $180 ceiling and payback stretches to a full year: still a healthy 3:1 ratio, but a very different business to finance. Notice that the ratio alone cannot tell these apart. A 3:1 ratio paid back in three months and a 3:1 ratio paid back in two years are not the same risk, and only one of them is fundable without outside capital.
Does retention drive LTV more than order value?
Lifespan multiplies straight through the formula. Holding AOV at $120, frequency at 2.5 a year, and margin at 60%:
| Customer lifespan | Orders | Revenue LTV | Gross profit LTV | LTV:CAC at $90 | Max CAC at 3:1 |
|---|---|---|---|---|---|
| 1 year | 2.5 | $300.00 | $180.00 | 2.00:1 | $60.00 |
| 2 years | 5.0 | $600.00 | $360.00 | 4.00:1 | $120.00 |
| 3 years | 7.5 | $900.00 | $540.00 | 6.00:1 | $180.00 |
| 4 years | 10.0 | $1,200.00 | $720.00 | 8.00:1 | $240.00 |
| 5 years | 12.5 | $1,500.00 | $900.00 | 10.00:1 | $300.00 |
Purchase frequency does the same over a fixed three-year life:
| Purchases per year | Orders | Revenue LTV | Gross profit LTV | LTV:CAC at $90 |
|---|---|---|---|---|
| 1.0 | 3.0 | $360.00 | $216.00 | 2.40:1 |
| 1.5 | 4.5 | $540.00 | $324.00 | 3.60:1 |
| 2.0 | 6.0 | $720.00 | $432.00 | 4.80:1 |
| 2.5 | 7.5 | $900.00 | $540.00 | 6.00:1 |
| 3.0 | 9.0 | $1,080.00 | $648.00 | 7.20:1 |
Arithmetically, a 20% lift in average order value and a 20% lift in retention both raise LTV by 20%. Economically they are not equal. Extra orders from existing customers carry no acquisition cost at all — the CAC was already paid — while acquiring 20% more customers costs 20% more acquisition spend, at rising prices. Raising AOV also usually raises cost of goods, so it delivers less margin than it appears to. Retention is the cheapest input in the formula to move, and in most businesses the one with the most headroom left.
Lifespan is often easier to reason about as churn:
Customer lifespan (years) = 1 ÷ Annual churn rate
| Annual churn | Implied lifespan | Gross profit LTV | LTV:CAC at $90 |
|---|---|---|---|
| 20% | 5.0 years | $900.00 | 10.00:1 |
| 25% | 4.0 years | $720.00 | 8.00:1 |
| 33% | 3.0 years | $540.00 | 6.00:1 |
| 50% | 2.0 years | $360.00 | 4.00:1 |
| 67% | 1.5 years | $270.00 | 3.00:1 |
Cutting churn from 50% to 33% is the same as handing yourself $180 more to spend per customer. That is usually a cheaper project than finding a media buyer who can cut CAC by a third.
Cohort LTV vs averaged LTV
Everything above uses a single average customer. Real businesses have distributions, and averages lie in a specific direction.
Averaged LTV takes all customers, computes mean order value and mean lifespan, and multiplies. It suffers from survivorship: the customers still active are, by definition, the ones who did not churn, so a spot average of "current customers" describes your best cohort rather than your next one. Whales make it worse — a handful of customers spending ten times the median can lift the mean well above what a typical new customer will ever do.
Cohort LTV groups customers by the month they were acquired and tracks each group forward. Month 1 of the January cohort, month 2, month 3, and so on. It answers a much better question: what does a customer acquired this way, at this price, right now actually produce? Channels differ enormously here. Customers won through a heavy discount often show a lower repeat rate than customers who arrived through search, even at identical first-order value — the Discount Margin Calculator shows what those promotions cost on the first order, before you count the weaker retention that follows.
Practical compromise: use cohort data for the parts you have observed, and only extrapolate a lifespan estimate that your oldest cohort supports. If your store is 14 months old, a three-year lifespan is a hope, not a measurement. Model it at 14 months, and treat anything beyond as upside.
Should you discount future revenue?
A dollar arriving in three years is worth less than one today, because of both the time value of money and the risk the customer never gets there. Applying a 10% annual discount rate to the default customer's $180 of gross profit per year:
| Year | Gross profit | Discount factor | Present value |
|---|---|---|---|
| 1 | $180.00 | 1.00 | $180.00 |
| 2 | $180.00 | 1.10 | $163.64 |
| 3 | $180.00 | 1.21 | $148.76 |
| Total | $540.00 | — | $492.40 |
Discounting cuts LTV by $47.60, or 8.8%. The ratio falls from 6.00:1 to 5.47:1 and max affordable CAC drops from $180.00 to $164.13. For a three-year lifespan the adjustment is real but rarely decision-changing. For a seven-year SaaS contract it is enormous, and skipping it is how long-horizon businesses justify indefensible acquisition budgets.
The calculator reports the undiscounted $540, which is the standard convention. If your lifespan runs past about three years, apply a discount rate yourself before setting a CAC ceiling.
The cash-flow trap: when a correct LTV still bankrupts you
CAC is paid this month, in cash. LTV arrives over years, in instalments. A business can be entirely right about lifetime value and still run out of money before it shows up.
Compare two customers with the same $540 gross profit LTV. One is acquired at $90 (6.00:1), the other at $400 (1.35:1) — both technically make money over three years.
| End of | Cumulative gross profit | Cash position at $90 CAC | Cash position at $400 CAC |
|---|---|---|---|
| Year 1 | $180.00 | +$90.00 | −$220.00 |
| Year 2 | $360.00 | +$270.00 | −$40.00 |
| Year 3 | $540.00 | +$450.00 | +$140.00 |
The $90 customer is cash-positive in their first year. The $400 customer is under water for more than two years — and if you acquire a thousand of them a month, you are funding a $220,000 monthly hole from somewhere. Growth makes this worse, not better: every additional customer deepens the hole before they help fill it, so the faster you scale a slow-payback model, the sooner you run out of cash.
Two rules keep this survivable. Fund acquisition out of gross profit you have already banked, not gross profit you expect. And set a payback ceiling — many e-commerce operators use CAC recovered inside the first order or first 90 days, and treat the ratio as a secondary check. LTV tells you whether a customer is worth having; payback tells you whether you can afford to buy them this month.
How to calculate LTV from your own data
- Pull 12–24 months of order history grouped by customer, not by order.
- Average order value — total revenue ÷ total orders. Use net revenue, after discounts and refunds.
- Purchases per year — total orders ÷ unique customers ÷ years covered. Fractional values are normal and correct.
- Lifespan — from your repeat curve, or 1 ÷ annual churn. Cap it at what your oldest cohort has actually lived.
- Gross margin — after COGS, inbound and outbound shipping, and payment fees. Not the number in your accounting summary.
- CAC — all sales and marketing spend, including agency fees, tools and salaries, divided by new customers only. Excluding salaries is the fastest way to a flattering CAC.
- Run it, then set your ceiling at gross profit LTV ÷ 3, and sanity-check payback in orders before you raise a single bid.
Common mistakes
Quoting revenue LTV as LTV. The default customer looks worth $900 and is worth $540. At a 3:1 rule that is the difference between a $300 CAC ceiling and a $180 one — a 67% overspend, applied to every customer you buy.
Using a gross margin that excludes shipping and fees. Outbound shipping and payment processing come out of each order like any other cost of goods. A 60% "gross margin" is often 48% once they are counted, which turns a $180 CAC ceiling into $144.
Assuming a lifespan you have never observed. A 14-month-old store claiming a three-year customer lifespan has invented two-thirds of its LTV. Model what your oldest cohort has actually done.
Averaging whales in with everyone else. A few very large customers pull the mean far above the median. Segment by channel and by cohort, and set bids against the customer the channel actually delivers.
Ignoring payback because the ratio looks fine. A 3:1 ratio with two-year payback and a 3:1 ratio with three-month payback are completely different businesses to finance. The ratio cannot see the difference.
Treating a 6:1 ratio as a victory. It is a signal that there is profitable demand you are declining to buy. Spend into it until the ratio falls toward 3:1, watching payback as you go.
Related calculators
- CAC Calculator — what a customer actually costs you to win, fully loaded
- CPA Calculator — cost per acquisition at the campaign level
- ROAS Calculator and Breakeven ROAS Calculator — the same ceiling expressed as a return on ad spend
- Conversion Rate Calculator — the step that turns a max CAC into a max click price
- CPC Calculator, CPM Calculator and CTR Calculator — the media prices your LTV has to support
- Profit Margin Calculator — get the gross margin right before you build an LTV on it
- How to price products for profit — pricing decisions that move every input in this formula
Frequently asked questions
How do you calculate customer lifetime value?
Multiply average order value by purchase frequency by customer lifespan, then apply your gross margin. $120 × 2.5 orders a year × 3 years is $900 of revenue — but only $540 of gross profit at a 60% margin. That $540 is the figure to plan against; the $900 is the one that gets businesses into trouble.
Should LTV be based on revenue or profit?
Gross profit, always. Revenue LTV of $900 against a 60% margin is really $540 — quoting the revenue figure overstates what a customer is worth by 67%, and it is the single most common way businesses talk themselves into overspending on acquisition. Every ratio below assumes gross profit.
What is a good LTV:CAC ratio?
3:1 is the working benchmark — a customer worth three times what they cost to acquire. Below 1:1 you lose money on every customer. Between 1:1 and 3:1 the model is thin and fragile. On these figures $540 of lifetime gross profit against a $90 CAC gives a ratio of 6:1.
Is a very high LTV:CAC ratio a good thing?
Not necessarily — above about 5:1 it usually means underinvesting in growth. A 6:1 ratio says you could profitably pay far more to acquire customers and are leaving volume on the table while a competitor takes it. Counterintuitive, but a ratio that looks too good is a signal to spend more, not to celebrate.
What is the maximum CAC I can afford?
Divide lifetime gross profit by your target ratio. At $540 of gross profit LTV and a 3:1 target, you can afford up to $180 per customer — double the current $90. That headroom is the practical output of an LTV calculation: it tells your media buyer what they are allowed to bid.
What increases LTV the most?
Retention, by a wide margin. Extending average lifespan from 3 years to 4 raises gross profit LTV from $540 to $720 with no change to price or acquisition. Purchase frequency is the next strongest lever. Raising prices helps too but usually costs some retention, so it is rarely the free win it appears to be.
Should I use cohort-based or average LTV?
Cohort, once you have the data. An average blends your best and worst customers into a number that describes nobody, and it hides the fact that acquisition channels produce very different customers. Cohorts by signup month or by channel show you which sources are worth paying more for.
Can a good LTV:CAC ratio still bankrupt a business?
Yes — this is the cash-flow trap. A 6:1 ratio spread over three years still means you pay the $90 CAC today and collect most of the $540 much later. If you scale acquisition faster than cash comes back, you can be entirely correct about lifetime value and still run out of money. Watch payback period alongside the ratio.
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