What Is LTV (Customer Lifetime Value)? Formula & How to Improve It (2026)

LTV (customer lifetime value) is the total profit — not revenue — a customer brings over the entire relationship. A common formula is: LTV = average order value × purchases per year × average retained years × gross margin. LTV sets how much you can afford to spend on acquisition — it has to comfortably exceed CAC for growth to be sustainable.

To put LTV and CAC side by side, use our CAC/LTV calculator.

The formula

Simplified: LTV = average order value (AOV) × purchase frequency per year × average retained years × gross margin

Multiplying by gross margin matters: LTV measures the profit a customer brings, not revenue. Using revenue alone overstates a customer's true worth.

To judge whether growth is healthy, compare LTV against CAC: the common healthy target is LTV:CAC ≈ 3:1.

Worked example

Average order value $50, the customer buys 3 times a year, stays 2 years on average, at a 40% gross margin. LTV = 50 × 3 × 2 × 0.40 = $120. If your CAC is $30, then LTV:CAC = 120:30 = 4:1 — very healthy, and a sign you could scale acquisition more aggressively.

The four LTV levers (how to improve it)

Lifting any of the four amplifies LTV; repeat purchase and retention are usually the highest-return levers in ecommerce.

Frequently asked questions

What's the difference between LTV and LTV:CAC? LTV is the total profit from one customer; LTV:CAC is its ratio to acquisition cost. Absolute LTV tells you how valuable a customer is; the ratio tells you whether your acquisition pays off (common healthy target 3:1).

Should LTV use revenue or profit? Profit. Always multiply by gross margin, or you'll overstate customer value and overspend on acquisition. A revenue-based "LTV" is only a rough ceiling.

How do I estimate LTV with no history? Start with a conservative estimate from early repeat rate and order value, or just check whether first-order contribution margin covers CAC; refine retention and frequency as data accrues.

What's the fastest way to raise LTV? Usually repeat purchase: lift frequency with email/SMS win-back and subscriptions while raising average order value (AOV) with bundles. Retaining existing customers almost always costs less than chasing new ones.

LTV and CAC are two sides of one coin: LTV sets how much you can spend to acquire, CAC is what you actually spent — read them together to know whether growth is truly healthy.