All you need to know about LTV and how it effects your business

The health and growth of your business depends on how well you understand your numbers—knowing where to cut costs and where to double down on success in real time.

Before diving into advanced metrics, it’s essential to track fundamental ones like profit, net profit, customer acquisition cost (CAC), and return on ad spend (ROAS) in real time. Once you have a solid grasp of these, you can move on to more strategic metrics that impact multiple aspects of your business, such as customer retention, loyalty, and lifetime value.

One of the most crucial metrics to track is Customer Lifetime Value (LTV)—the total revenue a business can expect from a single customer throughout their relationship. A strong understanding of LTV empowers businesses to make smarter decisions about customer retention, acquisition costs, and long-term growth strategies.

Calculating LTV: Basic and Advanced Methods

Basic LTV Calculation

Here is the basic formula for calculating LTV:

LTV = (Average Purchase Value × Purchase Frequency) × Customer Lifespan

For example, if a customer spends $50 per order, makes 5 purchases per year, and stays with your business for 3 years, their LTV would be $50 × 5 × 3 = $750.
The basic LTV formula gives you a starting point to estimate how much value a customer brings to your business. However, it’s only a rough estimate. To truly understand profitability, you need to factor in real costs and customer behavior. These advanced calculations play a key role in guiding the budget strategies mentioned earlier.

Complex LTV Measurement

Advanced LTV calculations dive deeper by including more variables that influence customer value over time. The formula expands to:

LTV = (Average Purchase Value × Purchase Frequency × Customer Lifespan × Gross Margin) – Customer Acquisition Cost

Here’s what advanced methods add to the equation:

• Gross margin percentages: Helps refine profitability estimates.
• Acquisition costs: Break down what you’re spending to gain each customer.
• Churn-adjusted lifespan: Accounts for customers leaving over time.

For example, Starbucks uses loyalty program data to pinpoint underperforming customer groups. Similarly, an online furniture store initially calculated an $800 LTV using a basic formula. But after accounting for a 15% annual churn rate, the actual LTV dropped to $680 – showing the importance of including churn in your calculations.

To maintain profitability, aim for at least a 3:1 LTV-to-CAC ratio.This means that for every dollar spent on acquiring a customer, the business should expect to generate at least three dollars in revenue from that customer over their lifetime.

1:1 or lower – Unsustainable; you’re spending as much (or more) to acquire customers as they bring in.

5:1 or higher – Could indicate underinvestment in acquisition; you might be missing opportunities to scale.

Other factors to keep in mind:

• How churn rates shorten customer lifespan
• Gross margin differences across product categories
• Seasonal shifts in buying habits
• Variations in acquisition costs by marketing channel

LTV Calculation Mistakes to Avoid

Even with advanced analytics tools, errors in implementation can lead to inaccurate LTV tracking, ultimately affecting business growth. In fact, study shows that 61% of companies struggle with LTV accuracy due to poor data quality.

Tracking All Customer Costs

A common mistake businesses make is underestimating the true cost of acquiring and retaining customers. Many focus solely on direct acquisition costs, neglecting other crucial expenses. Here’s a breakdown of often-overlooked costs:

Key Takeaway: Ensuring accurate LTV calculations means factoring in all acquisition and retention costs—not just ad spend. Getting this right leads to better financial decisions, stronger retention strategies, and ultimately, higher profitability.

3 Ways to Increase Your LTV

After calculating your LTV (Lifetime Value), use these five strategies to improve it effectively:

1- Building Customer Loyalty

Loyalty programs—like Sephora’s Beauty Insider—are a proven strategy for boosting retention and increasing customer spending. Studies show that members in these programs tend to spend 2-3 times more than non-members. Similarly, Starbucks’ Rewards Program demonstrates how well-structured tiers can drive engagement and foster long-term loyalty.

What Makes Loyalty Programs Effective?

• Tiered rewards that scale with spending levels, encouraging ongoing engagement.
• Achievable incentives to keep customers motivated and actively participating.
• Exclusive perks, such as early access to products, sales, or VIP events.
• Personalized offers based on past purchase behavior to enhance relevance and value.

By designing a loyalty program that aligns with customer preferences and shopping habits, businesses can turn one-time buyers into long-term brand advocates.

A well-executed loyalty program can significantly increase Average Purchase Value (APV) and Purchase Frequency (PF)—two key drivers of Customer Lifetime Value (LTV). As LTV grows, so do profits, allowing businesses to scale while becoming less dependent on customer acquisition costs (CAC).

2- Increasing Sales Per Customer

One powerful way to increase customer spending is by leveraging personalized recommendations and smart merchandising. By tailoring product suggestions and optimizing the shopping experience, businesses can encourage higher order values and repeat purchases.

Effective Strategies to Increase Customer Spend

✅ Cross-Selling & Upselling

• Use features like “Frequently Bought Together” or “Customers Also Bought” to encourage additional purchases.
• Offer premium upgrades, such as “Upgrade to a Pro Version” or “Add Warranty for Extra Protection.”

✅ Bundle Pricing

• Combine related products into discounted packages that encourage larger purchases.
• Example: Glossier’s “Skincare Sets”, where customers get savings when buying multiple products together.
• Tools: Bold Bundles, ReConvert, Fast Bundle (for Shopify users).

✅ Free Shipping Thresholds

• Set a minimum order value to qualify for free shipping, incentivizing customers to add more items.

✅ Exclusive offers for repeat buyers: Reward high-value customers with exclusive discounts or early access to new products.

By integrating these strategies with the right tools and platforms, businesses can increase Average Order Value (AOV), drive higher Customer Lifetime Value (LTV), and create a more engaging shopping experience that keeps customers coming back.

3- Managing Customer Acquisition Costs (CAC)

In previous sections, we discussed how to increase Customer Lifetime Value (LTV) by improving Average Purchase Value (APV) and Purchase Frequency (PF). However, reducing Customer Acquisition Cost (CAC) is the other crucial part of the equation for maximizing profitability and sustainable growth.

How to Effectively Manage Acquisition Costs

✅ Focus on High-Performing Channels

• Identify and double down on the marketing channels that attract your most loyal and high-value customers.
• Use tools like Google Analytics, Profit Analytics, or Peel Insights to track the Customer Acquisition Cost per Channel (CAC per Channel) and optimize ad spend accordingly.

✅ Use Retargeting to Re-Engage Interested Customers

• Retargeting campaigns help you reconnect with potential buyers who have interacted with your site but haven’t converted yet.
• Platforms like Facebook Ads, Google Display Network, and Klaviyo can help retarget visitors with abandoned carts or past purchasers.
• Example: set up email retargeting reminding shoppers about items they left in their carts

✅ Leverage Content Marketing for Long-Term Growth

• Investing in SEO-driven content, blogs, and social media helps build organic traffic and reduce reliance on paid ads.
• Tools like Ahrefs, SEMrush, and Clearscope can help optimize content to rank higher on Google.

Recap: Optimizing LTV and Managing CAC for Sustainable Growth

Maximizing Customer Lifetime Value (LTV) while effectively managing Customer Acquisition Cost (CAC) is key to building a profitable and scalable eCommerce business. By increasing Average Purchase Value (APV) and Purchase Frequency (PF) through strategies like smart merchandising, loyalty programs, and personalized recommendations, businesses can drive long-term revenue. At the same time, reducing CAC through high-performing marketing channels, retargeting, and content marketing ensures that growth remains cost-efficient.

It is crucial to track these metrics accurately and optimize continuously. Tools like Viably Profit Analytics provide a comprehensive view of CAC, marketing attribution, and clear view of LTV. You can also create custom reports tailored to your unique business needs, ensuring you have the right data insights to scale profitably. By leveraging the right strategies and tools, businesses can make data-driven decisions, improve profitability, and fuel sustainable growth. 🚀