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Performance · MetricsCustomer lifetime value (LTV): how to calculate and use it
Most businesses judge whether a customer was 'worth it' based on the first purchase alone. That's the wrong number — LTV captures the full relationship, and it's often the difference between a channel that looks unprofitable and one that's actually your best.
The basic calculation
LTV = average order value × purchase frequency × average customer lifespan
A simplified version many businesses start with: average revenue per customer per year × average years retained. Refine it further by subtracting cost-to-serve for a true profit-based LTV, not just revenue.
Why LTV should shape acquisition spend
| Looking only at first purchase | Looking at LTV |
|---|---|
| A ₹2,000 CAC against a ₹1,500 first order looks unprofitable | The same CAC against a ₹15,000 three-year LTV is a strong investment |
| Leads to under-investing in retention | Justifies retention spend that pays back over the relationship, not the first sale |
A business that only evaluates channels by first-purchase profit will systematically underinvest in acquisition, cutting channels that are actually profitable over the customer's full lifetime.
The mistake most businesses make
Treating LTV as a fixed number rather than something that varies significantly by acquisition channel, product line and cohort. A customer acquired through a referral often has meaningfully higher LTV than one acquired through a discount-driven ad — segment LTV by source before making acquisition decisions based on it.
The practical use: your maximum acceptable CAC should be a fraction of LTV, not a fraction of first-order profit. This single reframe often unlocks acquisition spend a business had wrongly written off as unprofitable.
The full build
See our D2C growth guide and attribution guide for connecting LTV to real channel decisions.
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