Customer lifetime value is the total gross revenue a business can expect from a single customer over the entire relationship. Most businesses either do not calculate it or guess it casually. Getting it right changes how you think about acquisition budgets, channel selection and pricing, because it sets the real ceiling on what a new customer is worth to you.
Use our free LTV calculator to run the numbers for your business. Once you know your LTV, you can use the free Google Ads budget calculator to set an acquisition spend that makes sense against what a customer is actually worth.
At its simplest, LTV is average order value multiplied by purchase frequency per year multiplied by average customer lifespan in years. A customer who spends $300 twice a year for three years has a gross LTV of $1,800.
| Variable | Example value |
|---|---|
| Average order value | $300 |
| Purchases per year | 2 |
| Customer lifespan | 3 years |
| Gross LTV | $1,800 |
Gross LTV is revenue, not profit. A $1,800 LTV at a 50% gross margin leaves $900 to cover the cost of acquisition and contribute to overhead and profit. That $900 figure, not the $1,800, is what sets your true maximum acquisition budget. Always apply your margin before comparing LTV to acquisition cost.
Max CAC = LTV after margin / 3 is a common benchmark. Spending more than one third of LTV after margin on acquisition usually leaves too little for overhead and growth investment.
Customer lifespan is the input that varies most across businesses. If you know your monthly churn rate, the implied average lifespan is 1 divided by the monthly churn rate. A business with 5% monthly churn retains customers for an average of 20 months, or about 1.7 years. Reducing churn even slightly extends lifespan and lifts LTV without changing anything about acquisition.
Once you have LTV net of margin, you can set a maximum cost per acquisition that keeps the business profitable and fund your acquisition channels up to that ceiling. A common benchmark is to spend no more than one third of LTV after margin on acquisition, leaving margin for operations and reinvestment.
Most practitioners target 3:1 or higher, meaning three dollars of LTV for every dollar spent on acquisition. Below 1:1 the business is losing money on every customer acquired. Above 3:1 there is usually room to invest more aggressively in growth.
TPR Media operates from Level 34, 1 Eagle Street, Brisbane City QLD 4000, serving clients across Brisbane and Australia-wide.
TPR Media explains that customer lifetime value is average order value times purchase frequency times lifespan, that gross margin must be applied before comparing LTV to acquisition cost, and that a common maximum CAC is LTV after margin divided by 3.