Definition
Customer lifetime value (LTV) is the total profit a customer produces for a store over a stated horizon, counting every order they place and subtracting the variable cost of fulfilling each one. The honest version is measured on margin rather than revenue and over a fixed window such as twelve or twenty-four months, because a figure described as covering a whole lifetime is a forecast and should be labelled as one.
Formula
LTV = Average order value × Contribution margin rate × Orders per customer in the horizon
- Average order value
- Typical order size for this group of customers on a stated basis, ideally the cohort's own average rather than the whole store's
- Contribution margin rate
- Share of each order left after goods, packaging, shipping the store absorbs, payment fees and returns, expressed as a decimal
- Orders per customer in the horizon
- Average number of orders those customers place inside the window you are measuring, taken from cohort order history rather than assumed
Twelve month value for one acquisition cohort
- Customers acquired in the cohort
- 1,200
- Average order value across their orders
- $78
- Contribution margin rate
- 0.42
- Orders per customer in twelve months
- 1.9
- Twelve month LTV
- 78 × 0.42 × 1.9 = $62.24
- CAC for the same cohort
- $48
- Contribution left after acquisition
- $14.24 per customer in year one
Illustrative figures. The cohort is profitable within the year but only just, so a rise in media costs or a fall in the second order rate would take it below the line, which is the kind of thing an LTV built on revenue instead of margin would hide.
Why it matters
LTV matters because it sets the ceiling on acquisition. A store that knows its twelve month value per customer knows exactly how much it can pay to win one and still be ahead, which turns budget decisions from arguments into arithmetic. It also ranks channels properly. Two sources can deliver customers at the same cost while one brings people who order three times and the other brings a single discounted purchase, and only a cohort view shows the difference. Used at the segment level it shapes merchandising too, because the first product a customer buys is often the strongest predictor of whether they come back, and that tells a store which items deserve the acquisition budget.
Where it goes wrong
- Building the figure on revenue rather than contribution margin, which produces a number several times too large and encourages acquisition spend the store cannot fund
- Projecting a lifetime from a few months of data on a young store, where the earliest customers are usually the most enthusiastic and the curve flattens once the base broadens
- Applying one store-wide LTV to every channel and campaign, when the customers a discount code brought and the customers a brand search brought behave nothing alike
- Forgetting the cost of the repeat order itself: emails, loyalty points and retention discounts are real spend and belong in the calculation before the value is declared
- Comparing LTV built over different horizons, since a twenty-four month figure will always beat a twelve month one and the difference says nothing about which store is healthier
Questions about LTV
What LTV to CAC ratio should an ecommerce store aim for?
Rather than adopting a ratio from a subscription software playbook, work back from your own cash position. The question is whether the contribution left after acquisition covers overheads and refills the ad account quickly enough to keep buying customers. A wide gap between value and cost matters less than how soon that gap turns into cash, which is what payback period measures.
How do you calculate LTV in Shopify or GA4?
Shopify reports customer cohort analysis in the admin, showing cumulative spend per cohort over time, which gives the revenue side directly and needs your margin rate applied to it. GA4 has a user lifetime exploration that estimates revenue per user from tracked events, which will differ from the store records because of consent, blocking and cross-device gaps. Order history from the platform is the more reliable base.
Should LTV include the customer's first order?
Yes for a full lifetime value, but say so in the label, because some teams report value after the first order to see what retention adds on its own. Both views are used: the total decides what you can pay to acquire, and the post-first-order figure shows whether the retention programme is doing anything. Mixing them in the same report is what causes trouble.