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How to Calculate Customer Lifetime Value (LTV) (Formula + Example)

Customer Lifetime Value is the total gross profit a brand expects to earn from a customer across their relationship. A common formula multiplies average order value by purchase frequency and customer lifespan, then applies the gross margin.

What is customer lifetime value?

Customer Lifetime Value (LTV, sometimes CLV or LCV) is the total profit a business expects to earn from a single customer across the entire span of their relationship. It rolls how much a customer spends per order, how often they buy, and how long they keep buying into one forward-looking number.

LTV matters because it sets the ceiling on what you can afford to spend to acquire a customer. A brand that knows its LTV can make acquisition, retention, and discounting decisions with discipline rather than guesswork. For consumable brands, where the same customer can reorder many times, LTV is often the single most important number to understand and grow.

The customer lifetime value formula

LTV = Average Order Value × Purchase Frequency × Customer Lifespan × Gross Margin

  • Average Order Value (AOV) — total revenue ÷ number of orders, for a given period.
  • Purchase Frequency — the average number of orders a customer places per period (for example, per year).
  • Customer Lifespan — the average length of time, in those same periods, that a customer keeps buying.
  • Gross Margin — the percentage of revenue left after cost of goods sold, used to express LTV as profit rather than revenue.

Keep the period units consistent: if purchase frequency is "orders per year," lifespan must be in years.

How to calculate customer lifetime value: a worked example

Take a consumable brand with the following figures.

  1. Average Order Value: $45.
  2. Purchase Frequency: 4 orders per year.
  3. Customer Lifespan: 2.5 years.
  4. Gross Margin: 60% (0.60).

Now multiply the inputs:

  • Annual value per customer = $45 × 4 = $180 per year.
  • Lifetime revenue = $180 × 2.5 = $450.
  • Lifetime value (profit) = $450 × 0.60 = $270.

This customer is worth $270 in gross profit over their relationship. If the brand can acquire similar customers for around $90, it sits at a healthy 3:1 LTV-to-CAC ratio. Notice that improving any single input — order size, frequency, or lifespan — flows straight through to LTV.

What's a good customer lifetime value?

LTV has no meaningful benchmark in isolation; its value lives in the ratio to customer acquisition cost. A commonly cited target for sustainable ecommerce is roughly 3:1 LTV-to-CAC, though early-stage brands investing in growth may run lower, and highly efficient brands higher. Treat these as directional, not absolute.

What matters more than any external figure is the trajectory. Rising LTV across cohorts means your retention and replenishment motions are compounding. The cheapest way to lift LTV is rarely to raise prices; it is to increase how often existing customers come back, which is largely a function of reorder frequency and customer lifespan.

How to improve customer lifetime value

Two of the three LTV inputs — purchase frequency and customer lifespan — are retention levers, and both respond to better reorder timing. When a consumable customer is prompted to restock at the moment they run low, they buy more often and stay active longer, which compounds directly into LTV. Calendar-blasting the same offer to everyone, by contrast, fatigues customers without lifting frequency.

This is where consumption-based timing pays off. An AI replenishment engine like reOtter predicts when each customer is likely to run out of a given product and fires the reorder moment accordingly, routing them to a one-click reorder storefront. By raising frequency and extending lifespan at the individual level, that timing precision lifts LTV without leaning on deeper discounts. The merchant sets the strategy; the AI does the math on who needs what, when.

Key takeaways

  • LTV = AOV × purchase frequency × customer lifespan × gross margin; keep period units consistent.
  • Judge LTV against acquisition cost, not in isolation — roughly 3:1 LTV-to-CAC is a common target.
  • Frequency and lifespan are the most controllable inputs, and both improve with well-timed reorder prompts.

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Frequently asked questions

What is a good customer lifetime value?
There's no universal target; LTV only has meaning relative to acquisition cost. A widely cited rule of thumb is an LTV-to-CAC ratio of about 3:1 for sustainable ecommerce. A high absolute LTV with an even higher acquisition cost is still unprofitable, so always evaluate the two together.
What's the difference between LTV and AOV?
Average order value (AOV) measures the revenue of a single order. Lifetime value (LTV) measures the total profit across every order a customer places over their relationship with you. AOV is one input into LTV; raising AOV lifts LTV, but so does raising how often customers buy and how long they stay.
Should I use revenue or margin in the LTV formula?
Use gross margin for a true LTV that reflects profit. A revenue-only figure overstates the value of each customer because it ignores cost of goods. If you want a quick directional number, revenue-based LTV is acceptable, but for budgeting acquisition spend, apply your gross margin percentage.
How is predictive LTV different from historical LTV?
Historical LTV sums what a customer has already spent. Predictive LTV forecasts future value using purchase patterns, frequency, and churn probability. Historical LTV is simpler and fully reliable; predictive LTV is more useful for decisions because it estimates value you haven't yet earned but can plan around.

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Metrics

Customer Lifetime Value (LTV)

Customer lifetime value is the total profit a brand expects from a customer across the relationship. For consumable brands, LTV is driven mostly by reorder frequency and retention — not the first order — which is why shortening reorder cycles raises LTV faster than discounting acquisition.

Metrics

Repeat Purchase Rate

Repeat purchase rate is the percentage of customers who buy more than once in a given period. It's a primary measure of retention and product-market fit for consumable brands; small increases compound into outsized lifetime-value gains because repeat buyers cost nothing to reacquire.

Metrics

Average Order Value (AOV)

Average order value (AOV) is the average amount a customer spends per order, calculated as total revenue divided by number of orders. Raising AOV — often through cross-sell at the reorder moment — increases revenue without acquiring new customers.

Metrics

Purchase Frequency

Purchase frequency is the average number of orders a customer places in a given period, calculated as total orders divided by unique customers. For consumable brands, increasing purchase frequency — by prompting reorders at the right time — is a primary lever on lifetime value.