How customer lifetime value is calculated

LTV is Average Order Value × Purchase Frequency (per year) × Average Customer Lifespan (in years). Applying your profit margin converts revenue-based LTV to profit-based LTV, and dividing that by your customer acquisition cost gives your LTV:CAC ratio — a common health metric where 3:1 or higher is considered sustainable.

How to use this LTV calculator

1. Enter your average order value, purchase frequency, and customer lifespan.
2. Optionally enter your profit margin and acquisition cost.
3. Click Calculate.

Why LTV:CAC ratio matters more than either number alone

Lifetime value on its own doesn’t tell you whether your business model works — it has to be weighed against what it costs to acquire that customer in the first place. A 3:1 LTV:CAC ratio (profit-based LTV at least three times your acquisition cost) is a commonly cited benchmark for a sustainable business, since it leaves enough margin to cover operating costs beyond just marketing.

Factors that affect customer lifetime value

• Purchase frequency: More frequent repeat purchases compound into meaningfully higher LTV over the same customer lifespan.
• Retention / customer lifespan: A longer average relationship multiplies every other factor — see our churn rate calculator to understand what’s driving your retention.
• Average order value: Upsells and higher-value orders increase LTV without needing more customers or more purchases.

Tips for using LTV in decision-making

Use profit-based LTV, not revenue-based LTV, when comparing against acquisition cost — revenue-based LTV ignores your cost of goods and overhead, overstating how much you can actually afford to spend to acquire a customer. If your ratio is below 3:1, it’s often more effective to invest in retention than in cutting acquisition costs, since a longer customer lifespan improves LTV directly.

Expert insight: where the 3:1 benchmark actually comes from

The commonly cited 3:1 LTV:CAC benchmark traces back to venture capitalist David Skok’s influential „SaaS Metrics 2.0“ framework, published on his For Entrepreneurs blog based on patterns he observed across mature, publicly traded SaaS companies with stable churn and payback periods under a year. It’s worth knowing the benchmark’s origin: Skok derived it from steady-state, established businesses, not early-stage startups — a young company with a lower ratio isn’t necessarily unhealthy, it may simply not have reached the stage the benchmark was designed to describe.

Related calculators

• CPA Calculator
• Churn Rate Calculator
• ROAS Calculator