Stop 08 · Marketing Analytics & DataTopics · 9/11

Customer Lifetime Value (LTV)

In short

One customer isn't worth one order. They might buy for years. LTV estimates that total, and it tells you how much you can sensibly spend to win them.

The total revenue (or profit) expected from a customer over their entire relationship with the business — paired with CAC, it tells you whether your growth is actually sustainable.

The blob chaiwala pours tea from a kettle into a small glass for a smiling regular customer.

Think of it like this

The daily chai regular

A tourist buys one chai and leaves. The office uncle buys two cups every day for five years. The chaiwala happily gives him a free biscuit sometimes. He knows that regular is worth thousands, not ten rupees.

Watch it happen

One customer's value adding up over three years

Year 1: ₹3,600

Year 2: ₹3,600

Year 3: ₹3,600

1/4A meal-kit customer orders ₹600 worth, about six times a year.

The big ideas

What you need to know

Simple formula

LTV = average order value x orders per year x years as a customer x margin.

LTV to CAC

A common rule of thumb is LTV around three times CAC or more. Below one, you lose money per customer.

Retention drives LTV

Keeping customers longer often raises LTV more than raising prices.

LTV by segment

Customers from different channels can have very different LTV. Compare them before shifting budget.

See it in code

Walk through the code

excel

1B1  Average order value     6002B2  Orders per year           63B3  Years as customer         34B4  Gross margin            30%5B5  LTV (revenue)   =B1*B2*B3          → ₹10,8006B6  LTV (profit)    =B5*B4             → ₹3,2407B7  LTV : CAC       =B6/800            → 4.05

1/3How much, how often, and for how long customers buy.

A quick LTV estimate. Real models also account for people leaving at different times, but this is a solid start.

Save yourself the pain

Common mistakes

Oops

Using revenue LTV against CAC.

Do this instead

Use profit (after product cost). Revenue makes customers look far more valuable than they are.

Oops

Assuming every customer stays five years in a new business.

Do this instead

Base lifespan on real retention data, and be conservative until you have it.

Your mission

Estimate LTV for two segments

~20 min

Quick check

Profit LTV is ₹900 and CAC is ₹1,200. What does this mean?

Go deeper

1Calculate a rough LTV for a hypothetical subscription product using average order value and retention.
2Learn the commonly cited healthy benchmark (LTV:CAC around 3:1) and why it's a rule of thumb, not law.
3Understand why a growing customer base can still mean a dying business if this ratio is broken.