What is Customer Lifetime Value (LTV)?
Customer Lifetime Value, commonly abbreviated as LTV or CLV (Customer Lifetime Value), represents the total revenue a business can expect from a single customer account throughout their entire relationship. It's one of the most important metrics in eCommerce because it shifts your focus from individual transactions to long-term customer relationships.
The basic formula for calculating LTV multiplies three key components: how much customers spend on average, how often they purchase, and how long they remain customers.
For example, if customers spend $100 on average, purchase 3 times per year, and remain customers for 4 years, the LTV is $100 × 3 × 4 = $1,200. This single customer is worth $1,200 to your business over their lifetime.
There's also a profit-based LTV calculation that factors in your profit margin. This gives you a more accurate picture of how much you can actually afford to spend acquiring customers while remaining profitable.
Why Customer Lifetime Value is Your Most Important Metric
With net margins for eCommerce averaging just 4.6%, LTV is a make-or-break metric that merchants cannot afford to ignore.[1] Understanding LTV fundamentally changes how you think about customer acquisition, marketing spend, and business growth.
When you know your LTV, you can make informed decisions about how much to spend acquiring new customers. If a customer is worth $500 over their lifetime and costs $100 to acquire, that's a healthy 5:1 return. But if you're spending $200 to acquire $300 customers, your margins are dangerously thin.
LTV also helps you identify your most valuable customer segments. Not all customers are created equal. Some purchase once and never return, while others become loyal repeat buyers worth ten times as much. Understanding these differences allows you to focus your marketing on attracting and retaining high-value customers.
Perhaps most importantly, LTV shifts your mindset from short-term transactions to long-term relationships. Instead of optimizing for the immediate sale, you start thinking about customer experience, retention, and strategies that increase value over time.
How to Calculate Customer Lifetime Value
There are several methods for calculating LTV, ranging from simple to sophisticated. The right approach depends on your data availability and business model.
Simple LTV Formula
The simplest approach multiplies average order value by purchase frequency and customer lifespan. This works well for businesses with consistent purchasing patterns.
Finding Your Inputs
To calculate LTV accurately, you need to determine three key metrics from your data:
- Average Purchase Value: Total revenue divided by number of orders in a period
- Purchase Frequency: Number of orders divided by unique customers in a period (typically annual)
- Customer Lifespan: Average time between first and last purchase, or use cohort analysis to project
In Shopify, you can find average order value in your Analytics dashboard. Purchase frequency and customer lifespan require analyzing your customer data, which tools like Klaviyo, Shopify's customer reports, or dedicated analytics platforms can help with.
Profit-Based LTV
For more accurate acquisition budgeting, calculate LTV based on profit rather than revenue. Multiply your revenue LTV by your profit margin to understand how much actual profit each customer generates.
Customer Lifetime Value Benchmarks by Industry
LTV varies dramatically across industries, product categories, and business models. Understanding where you stand helps set realistic improvement targets.
According to Shopify data, Home and Garden brands show the highest LTV potential, with top performers earning almost 3x the revenue in Month 1 and ending with $122 more per customer by Year 1.[2] This suggests successful home goods brands excel at upselling and cross-selling.
Supplements have seen strong LTV growth recently. Data from Q1 2024 showed supplement brands had a 37.7% repurchase rate, up from 33.1% the prior year, with retention rates around 23.4% versus 19% previously.[2]
Key patterns by vertical include:
- Beauty: Top brands earn an extra $40 per customer by Month 12, though LTV curves flatten around Month 7
- Fashion: Top performers out-earn peers by $59 per customer in Year 1, with curves flattening around Month 5
- Food and Beverage: Top F&B brands earn $40 more per customer in Year 1 through continued monetization, while median brands stop monetizing by Month 6
The LTV:CAC Ratio: Your Growth Indicator
The LTV to CAC ratio compares customer lifetime value to customer acquisition cost, providing a clear picture of whether your growth is sustainable. The most common benchmark for this ratio is 3:1.[3]
A 3:1 ratio means an average business spends about one-third of a customer's lifetime revenue to acquire that customer. This leaves enough margin for operations, fulfillment, and profit.
Understanding your ratio helps guide strategy:
- Below 1:1: You're losing money on every customer. Urgent action needed.
- 1:1 to 2:1: Margins are thin. Focus on improving LTV or reducing CAC.
- 3:1: Healthy benchmark. Sustainable growth is possible.
- 4:1 or higher: Great business model. Could potentially invest more in acquisition.
- 5:1 or higher: You may be under-investing in marketing and limiting growth.[3]
A healthy ratio above 3:1 after three years in business is a common goal. Mature businesses typically see higher LTVs and lower CACs than startups as they refine their operations.
Proven Strategies to Improve Customer Lifetime Value
Improving LTV is often more cost-effective than acquiring new customers. Here are strategies that consistently deliver results.
Increase Purchase Frequency
Email marketing, loyalty programs, and subscription options encourage customers to return more often. Automated flows for post-purchase followup, replenishment reminders, and win-back campaigns keep your brand top of mind.
Increase Average Order Value
Upselling, cross-selling, bundling, and strategic free shipping thresholds encourage larger purchases. Each dollar added to average order value multiplies across all future purchases.
Extend Customer Lifespan
Exceptional customer service, quality products, and ongoing engagement extend how long customers stay active. Loyalty programs with meaningful rewards create switching costs that keep customers coming back.
Improve Customer Experience
From website usability to packaging to customer support, every touchpoint affects whether customers return. Investing in experience improvements often pays dividends across all three LTV components.
Focus on High-Value Segments
Identify your highest-LTV customer segments and focus acquisition efforts on attracting similar customers. Personalize marketing and product recommendations based on customer value tier.
Frequently Asked Questions
A "good" LTV depends on your industry and acquisition costs. The key metric is your LTV:CAC ratio. A healthy ratio is 3:1 or higher, meaning customers generate at least 3x what you spent to acquire them. For Shopify stores, top performers in categories like Home & Garden see LTVs $100+ higher than median competitors within the first year.
Divide your total number of orders by unique customers over a period (typically one year). In Shopify, you can use customer reports to analyze repeat purchase behavior. Tools like Klaviyo also provide purchase frequency analytics. A typical eCommerce purchase frequency is 1.5-3 times per year, though subscription businesses see much higher rates.
Use revenue LTV for benchmarking and tracking trends, but use profit LTV when making acquisition decisions. Profit LTV gives you a realistic picture of how much you can spend acquiring customers while maintaining profitability. If you spend based on revenue LTV, you may acquire customers at a loss.
Analyze cohorts of past customers to see how long they remain active. A customer is typically considered "churned" if they haven't purchased in 2-3x your average purchase cycle. For newer businesses, you may need to project based on early retention rates or use industry benchmarks as a starting point.
LTV determines how much you can profitably spend on advertising. If you only consider first-purchase value, you'll underinvest in acquisition. A customer who spends $50 initially but $500 over their lifetime is worth much more aggressive acquisition spending than someone who never returns. Understanding LTV allows you to outbid competitors who only optimize for immediate ROAS.
References
- MobiLoud - With net margins for eCommerce averaging just 4.6%, LTV is a make-or-break metric.
- Varos - Shopify LTV benchmarks by vertical, including Home & Garden, Beauty, Fashion, and F&B.
- First Page Sage - The most common benchmark for LTV-to-CAC ratio is 3:1. A ratio of 5:1 or higher may indicate under-investment in marketing.
- Shopify - How to calculate customer lifetime value and why it matters for eCommerce businesses.
