Calculating Lifetime Value

Understand the concept of lifetime value and its importance for e-commerce success.

Learn the formulas for calculating LTV and identify the inputs needed for accurate calculations.

Explore the relationship between retention, churn, and LTV.

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Lifetime Value (LTV)

Predict the net profit attributed to the entire future relationship with a customer.

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Lifetime Value (LTV)

The total worth to a business of a customer over the whole period of their relationship.

An important metric for understanding how much to invest in acquiring new customers and retaining existing ones.

Helps businesses make decisions regarding sales, marketing, product development, and customer support.

What is Lifetime Value?

Imagine you've got a loyal customer who keeps coming back to your coffee shop. Over the years, they buy hundreds of coffees, pastries, and even some merchandise. The total amount they spend during their relationship with your shop is their Lifetime Value (LTV). In a broader sense, LTV represents the total revenue you can expect from a single customer over the duration of their relationship with your business.

Why is Lifetime Value Important?

LTV gives you a clearer picture of the long-term value of your customers, not just a one-off purchase. It helps in:

  1. Budgeting and Forecasting: Knowing the LTV can guide how much you're willing to spend on acquiring new customers.
  2. Strategic Planning: It can influence product development, customer service strategies, and loyalty programmes.
  3. Profitability Analysis: Understanding LTV in relation to the cost of acquiring a customer (CAC) can give insights into the profitability of your customer base.

How Do I Calculate Lifetime Value?

LTV can be calculated using this simple formula:

LTV = (Average Purchase Value x Average Purchase Frequency) x Average Customer Lifespan

For instance, if a customer typically spends €50 every month for three years, their LTV would be €50 x 12 x 3 = €1800.

In a Nutshell...

Lifetime Value is a crystal ball into the future potential of each customer. It's not just about the here and now but the long-term relationship and revenue potential. By understanding and optimising LTV, businesses can make more informed decisions about marketing

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Frequently asked questions

Frequently asked questions about this concept.

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Laurens Spiele
Laurens Spiele
Head of Channels & Solutions