Unit Economics
What Is Customer Lifetime Value (LTV)?
LTV is the total contribution margin a customer generates over their full relationship with your brand, not just revenue. Most operators overstate it by using revenue, ignoring COGS and return rates. The number only matters relative to CAC and your payback window. Get the denominator right before optimizing for it.
Customer Lifetime Value (LTV) is the total contribution margin a customer generates over the entire course of their relationship with the brand. It is the partner number to CAC, without LTV, CAC has no meaning.
How LTV is calculated
LTV = Sum of (Contribution Margin per Order × Probability of That Order Happening) over the time horizon.
Simpler version most ecom CFOs use: LTV (24-month) = Average First-Order CM2 × Average Lifetime Order Count (24-month).
Use CM2 (contribution margin after marketing), revenue-based LTV overstates the metric.
Example
A DTC beauty brand: average first-order CM2 is $26. Cohort analysis shows the average customer places 3.4 orders over 24 months. 24-month LTV = $26 × 3.4 = $88.40. If paid CAC is $24, LTV:CAC = $88.40 ÷ $24 = 3.68x. Healthy.
What's a good LTV?
Vertical-dependent. Composite 24-month LTV ranges (CM-based):
- Beauty / personal care DTC: $120$380
- Apparel DTC: $180$450
- Food & beverage DTC (subscription): often 24x first-order value
- Outdoor / hardgoods: $250$800 (premium products, long replacement)
- Premium / luxury DTC: $1,500$8,000
For the framework view see LTV:CAC ratio guide.
The most common mistake
Computing one LTV across all channels. Customers from different channels have radically different LTVs. Meta prospecting customers typically have 6080% the LTV of organic / brand-search customers because intent at acquisition is different. Compute LTV per channel; that's what drives reallocation decisions.
Frequently Asked Questions
should LTV use revenue or contribution margin?
Contribution margin. Revenue-based LTV overstates the metric by ignoring repeat-order fulfilment costs.
what time horizon should I use?
24 months is the standard. 36+ months acceptable for premium DTC with long repeat cycles. Beyond 36 months the cohort noise overwhelms the signal.
how is LTV different from AOV?
AOV is one order. LTV is total contribution from all orders over the time horizon. High AOV without repeat = low LTV. Low AOV with strong repeat (subscription) = high LTV.
Related Terms
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
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