Marketing metrics explained

What is LTV

LTV is lifetime value: the total a customer is worth to you across every order they place, from the first to the last.

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If a typical customer places four orders of £40.00 before they stop buying, their LTV on a revenue basis is £160.00. On a gross margin basis, at 60% margin, it is £96.00. Both figures are called LTV, which is where the trouble starts.

It is the number that justifies spending money to win a customer. A £40 acquisition cost is cheap or expensive only in relation to it.

How it's calculated

The simplest version:

LTV = average order value × average orders per customer × gross margin

Average orders per customer is orders per year multiplied by years as a customer, which is how the formula page writes it out.

The margin term is optional but recommended, for reasons below. The variants (with a churn rate, or built from cohorts) and a Google Sheets version are on the customer lifetime value formula page.

What it tells you, and what it doesn't

LTV tells you the ceiling on what you can afford to pay for a customer. Divide it by CAC and you have the LTV to CAC ratio, the figure people quote to say whether a business's marketing is sustainable.

Split by where customers came from, LTV tells you which channels bring customers who stay. A channel with a high CAC and a high LTV may be better than a cheap channel whose customers never come back.

It does not tell you when the money arrives. An LTV of £160 earned over three years is not £160 in the bank this quarter, which is why CAC payback period sits beside it.

It is also a prediction dressed as a measurement. A customer's lifetime is only known once it has ended. For anyone still buying, LTV is an estimate built from how past customers behaved, and it is only as good as the assumption that new customers will behave the same way.

Where it goes wrong

Revenue when you meant margin. An LTV of £160 against a CAC of £40 looks like a 4:1 ratio. If £160 is revenue and the margin is 60%, the real return is £96 against £40, which is 2.4:1. Compare like with like: CAC is a cost, so the LTV beside it should be a margin figure.

Averaging across customers who have not finished. A customer who joined last month has one order so far. Averaging their £40 in with customers from three years ago drags the figure down and makes LTV look like it is falling when the business is simply growing. Cohort analysis fixes this by comparing customers of the same age.

Extrapolating from the early days. With six months of data, you do not know what a customer does in year two. Any LTV figure that reaches beyond your own history is a guess, and should be labelled as one.

Including the discount that won them. If the first order came with 20% off, the first order's margin is lower than the average. An LTV built on average margin overstates what a discounted cohort returns.

Related metrics

• Customer lifetime value formula: the calculation and its variants.
• LTV to CAC ratio: value against cost.
• CAC payback period: how long until the value covers the cost.
• Retention rate formula: the figure that decides how many orders a customer places.
• Churn rate formula: the same thing from the other side.
• AOV formula: the first term in the LTV calculation.

Keeping it current

A scheduled Fresh Sheets report can pull orders from Shopify into a tab of your spreadsheet, by day, with the order count and the order totals. It replaces that tab's contents on every refresh, so keep your formulas on a separate tab.

From that tab, average order value by heading, with Net payment being what the store received after refunds:

=SUM(INDEX('Shopify'!A:Z, 0, MATCH("Net payment", 'Shopify'!1:1, 0))) / SUM(INDEX('Shopify'!A:Z, 0, MATCH("Orders", 'Shopify'!1:1, 0)))

Orders per customer needs a customer against each order, which the report does not carry: take it from Shopify's own orders export (Orders, then Export), where the Email column identifies the customer, as the row count over COUNTUNIQUE of that column. Source: Shopify Help Centre, Exporting orders. Multiply the two, then by your gross margin typed into a cell on the formulas tab.

Work out your customer lifetime value with the free LTV calculator