What Is LTV and How to Calculate It? What Should Your LTV:CAC Ratio Be? (Cohort and Ad Examples)

What is LTV? (Short answer)

LTV (lifetime value, also CLV or CLTV) is the total profit a customer leaves over their relationship with your business. It sets the most you can spend to acquire a customer, which is why it is used alongside CAC (customer acquisition cost).

The simplest ecommerce formula: LTV = Average order value × Orders per customer × Contribution margin. Example: a store with a $60 average order where customers place 2.3 orders in 24 months and 35% of revenue is left after product cost, shipping, payment fees and returns. LTV = $60 × 2.3 × 0.35 = $48.30.

The same customer's revenue LTV is $60 × 2.3 = $138. Many guides use that revenue figure; planning ad spend around $138 lets you spend almost three times what a customer can actually earn you. (All amounts are illustrative.)

How do you calculate LTV? Three formulas

Which formula you use depends on your business model and how much data you have. All three end with a margin multiplier: contribution margin (product, shipping, fees and returns deducted) is common in ecommerce, gross margin in SaaS.

• Ecommerce (repeat purchase): LTV = Average order value × Orders per year × Active years × Contribution margin
• Subscription / SaaS: LTV = Monthly revenue per account (ARPA) × Gross margin / Monthly churn rate (1 / churn = average lifetime in months)
• Cohort (realised) LTV: LTV(month n) = Cohort's cumulative revenue to month n / Customers in cohort × Margin
• LTV:CAC = LTV / CAC; CAC payback (months) = CAC / Monthly margin contribution per customer

Why is LTV calculated on margin, not revenue?

LTV exists to answer 'how much can I spend on this customer?'. The product cost, shipping and fees inside what the customer pays were never yours; only the remaining contribution can fund acquisition.

If the example store targets LTV:CAC = 3 on revenue LTV ($138), it thinks it can spend up to $46 per customer. With a margin-based LTV of $48.30, that means roughly breaking even even after 24 months. On margin, the same target allows a $16.10 CAC.

In ecommerce, contribution margin is a step better than gross margin: in high-return categories (apparel, footwear), a gross-margin LTV comes out noticeably higher than reality.

How do you calculate cohort LTV? A step-by-step example

'Customer lifetime' and 'orders per year' in the formulas are usually estimates. The cohort method replaces them with realised data: take customers who placed their first order in the same month as one group (cohort) and add up all their later orders cumulatively.

Example: 1,000 customers who first ordered in January are tracked. Cumulative orders per customer are shown below; each order is $60 and leaves $21 of contribution at a 35% margin.

Where the curve flattens (after month 12 here) indicates a sensible LTV horizon. Put several cohorts side by side (different months, different channels) and you also see which channel brings more loyal customers; a channel can have a high CAC but a steep cohort curve.

• First order (month 0): 1.00 orders → $60 revenue → $21 contribution
• Month 3: 1.15 orders → $69 revenue → $24.15 contribution
• Month 6: 1.35 orders → $81 revenue → $28.35 contribution
• Month 12: 1.80 orders → $108 revenue → $37.80 contribution
• Month 24: 2.30 orders → $138 revenue → $48.30 contribution (24-month LTV)

What is the LTV:CAC ratio and what should it be?

LTV:CAC is the expected margin contribution from a customer divided by the cost of acquiring them. The rule of thumb widely used in SaaS and startups is at least 3. It is not a scientific threshold but a safety buffer for overheads beyond CAC and for estimation error.

Always check how LTV was calculated: a 3:1 on revenue LTV can fall to 1:1 on margin.

• Below 1: each new customer loses money even over the full horizon. Fix price, margin or retention before scaling acquisition
• 1–3: you recover acquisition cost but leave little for overheads and growth; acceptable if payback is short
• 3–5: healthy for most businesses
• Well above 5: you may be under-investing in acquisition; try scaling into more expensive channels

Why is LTV:CAC not enough on its own? CAC payback

LTV:CAC tells you how much comes back, not when. For cash flow, the real question is in which month CAC is recovered. A cohort table shows it directly: payback is the month cumulative contribution passes CAC.

Two scenarios on the same cohort: at a $16 CAC, first-order contribution ($21) covers CAC immediately and 24-month LTV:CAC is about 3.0. At a $30 CAC, cumulative contribution is still below CAC at month 6 ($28.35), CAC pays back around month 7 and the ratio drops to 1.61. In the second scenario, growth ties up cash for longer.

A practical frame: in ecommerce, aim to recover CAC on the first order or within a few months; in B2B SaaS, under 12 months. Use the CAC Payback Period calculator to work it out from monthly contribution per customer.

How much can you spend on ads based on LTV?

Getting from LTV to an ad target takes two steps. First choose a policy: Max CAC = LTV / Target LTV:CAC, or 'recover CAC within X months'. Then translate it into the campaign's first-order metric: First-order ROAS target = Average order value / Max CAC.

For the example cohort ($60 order, $21 first-order contribution, $48.30 24-month LTV), different policies give these limits:

Note: CAC is not only ad spend; it includes agency, team and tool costs. The CPA limit you put in the ad platform should therefore sit a little below max CAC. And because repeat purchase is low here (2.3 orders in 24 months), the 3:1 target demands a stricter ROAS than first-order break-even; for frequently repurchased products (cosmetics, supplements, pet food) the picture flips and LTV can justify losing money on the first order.

• Break even on the first order: max CAC $21 → first-order ROAS target ≈ 2.86
• Pay back within 12 months: max CAC $37.80 → ROAS ≈ 1.59
• 24-month LTV:CAC = 3: max CAC $16.10 → ROAS ≈ 3.73
• Spend the full 24-month LTV (break-even, not recommended): max CAC $48.30 → ROAS ≈ 1.24

LTV in SaaS: formula LTV and a time cap

The subscription formula LTV = ARPA × Gross margin / Monthly churn assumes that, with constant churn, a customer could stay forever. At low churn that pins LTV on a long, uncertain future, so many teams cap LTV at 24–36 months.

Example: ARPA $150 per month, 80% gross margin, 3% monthly churn. Monthly gross profit per customer is $120; formula LTV is $120 / 0.03 = $4,000. Capped at 36 months: $120 × (1 − 0.97^36) / 0.03 ≈ $2,664. With a $1,200 CAC the ratio is 3.33 on the formula and about 2.22 capped; payback is $1,200 / $120 = 10 months.

If the gap is large, decide on capped LTV and payback. Also remember that CAC spent today is worth more than profit that trickles back over years, especially with high inflation; thinking about long-horizon LTV in real terms is safer.

Common LTV calculation mistakes

LTV mistakes usually point the same way: they inflate LTV and over-fund acquisition.

• Calculating LTV:CAC on revenue LTV → the ratio looks 2–3 times better than it is
• Averaging all customers → calculate by channel and cohort; customers acquired through discounts usually repurchase less
• Assuming customer lifetime → check against cohort data; 1 / churn can hide heavy early losses
• Ignoring returns, discounts and free shipping → calculate LTV on contribution margin
• Unlimited time horizon → cap at 24–36 months and check payback too
• Crediting organic repeat orders to ads → when calculating LTV:CAC per channel, match that channel's CAC with that channel's cohort

How do you increase LTV?

LTV has three levers: contribution per order, order frequency and active lifetime. The cohort curve shows where you are weak: if it flattens by month 3, flows that trigger the second order (email, remarketing, a subscription option) come first; if baskets are small, bundles and cross-sells; if margin is low, pricing and shipping policy.

In SaaS the biggest effect comes from churn; because churn is the denominator, cutting monthly churn from 3% to 2.5% raises formula LTV by 20% with everything else equal. Track NRR to see expansion revenue (upgrades, seat growth) too.