How is LTV calculated?

LTV is calculated as: LTV (DTC) = AOV × Purchases per year × Gross margin × Retention years. A coffee subscription has $25 AOV, 10 orders/year, 60% gross margin and 2-year average retention. LTV = $25 × 10 × 0.6 × 2 = $300.

Glossary · Performance metrics

LTVLifetime Value

LTV is the total revenue or profit a single customer generates over their entire relationship with the business.

Formula

LTV (DTC) = AOV × Purchases per year × Gross margin × Retention years

What does LTV actually mean?

Lifetime Value (LTV), sometimes called Customer LTV (CLV or LTV:V), measures total revenue or profit a customer produces over their relationship with the business. LTV can be measured as gross revenue or contribution margin; the latter is more useful for unit economics.

LTV is heavily category-dependent. SaaS LTV is gross profit per month × average tenure. DTC LTV is purchase frequency × AOV × gross margin × retention years. Subscription apps blend monthly subscription revenue with churn rates.

The key tension: most ad platforms optimize toward first-purchase or 7-day events, not LTV. High-LTV brands often need to bid 'higher than CPA' on first purchase because long-term value justifies it. Modern teams send LTV signals back to ad platforms (via CAPI, server-side tracking) so the algorithm can optimize toward high-LTV customers specifically.

Example

A coffee subscription has $25 AOV, 10 orders/year, 60% gross margin and 2-year average retention. LTV = $25 × 10 × 0.6 × 2 = $300.

When it matters

A strong LTV supports a higher acceptable CAC. Brands with strong LTV can outbid competitors on first purchase because they recover the gap on repeat orders.

Related terms

CAC

Customer Acquisition Cost

CAC is the total cost of acquiring one new paying customer, including ads, salaries and tooling. It's broader than CPA.

AOV

Average Order Value

AOV is the average revenue per order. Increasing AOV is one of three core levers for ecommerce growth (alongside traffic and conversion rate).

ROAS

Return on Ad Spend

ROAS measures revenue generated for every dollar of ad spend. A 4× ROAS means $4 in revenue for each $1 spent.

CPA

Cost Per Acquisition (or Action)

CPA is the cost to drive one conversion event: a purchase, signup, lead or install. It's the universal performance metric.

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