What is customer lifetime value (LTV)?
How is LTV worked out?
The three approaches answer different questions.
- Historical. Add up what customers have already spent1. It is real, but it looks backwards.
- Predictive. Estimate what customers will spend from here1. It is a model, so it is only as good as its assumptions.
- Cohort-based. Group customers by a shared trait, usually the month of their first purchase, and follow each cohort over time. A retention agency that sells a Shopify analytics tool argues this is by far the best framework2. Weigh that against what it sells.
For ZFD: Our convention is to count LTV on margin, not on revenue, and to state the horizon in months. Margin here means contribution margin before marketing: revenue minus cost of goods, shipping, payment fees, returns and discounts. Sources differ on which costs they include, so we list ours.
Why does LTV matter?
LTV sets how much you can afford to pay to win a customer. Compare it with CAC, the cost of winning one new customer. The payback period then tells you how many months the margin takes to repay that cost.
An attribution software vendor's guide lists traps in the LTV:CAC ratio: revenue-based LTV, acquisition cost counted per order instead of per new customer, and the 3:1 rule, which it traces to venture-backed SaaS rather than physical products3.
Worked example
Easily confused with
LTV vs Average order value
What one order is worth. LTV adds repeat orders and time.
LTV vs CAC
The cost side. LTV is the value side.
LTV vs Revenue per customer to date
That is historical revenue, one input into LTV and not the whole thing.
Buzzword alert
"LTV is high, so payback is fine"
Usually means: a projection on revenue, with the months not yet lived by any customer.
Ask: in which month does the margin from these customers repay what they cost?
"Our LTV:CAC is healthy"
Usually means: two numbers, each defined by whoever quoted them.
Ask: what costs are in each side of the ratio?
FAQ
Is LTV the same as CLV?
Yes. CLV and CLTV are other names for customer lifetime value. We write LTV and say whether it is on margin or revenue.
Cohort LTV vs predictive LTV: what is the difference?
Cohort LTV follows real groups of customers through the months they have actually lived. Predictive LTV estimates the months still to come. A young brand has little history, so a prediction may be all there is.
Should LTV use revenue or margin?
Our convention is margin. Revenue tells you what came in, not what you kept.
Let’s find what’s actually working.
Next step. See how margin changes your numbers with the Is your ROAS real? calculator.