How to calculate customer lifetime value
Lifetime revenue = AOV × Purchases per year × Years as a customer
Lifetime gross profit = Lifetime revenue × Gross margin %
Suggested max acquisition cost = Lifetime gross profit ÷ 3
The last line applies the common 3:1 LTV:CAC rule of thumb: a customer should generate about three times more gross profit than it cost to acquire them. That leaves room for overhead, returns and the uncertainty in any lifetime estimate.
Worked example
A store selling specialty coffee has these averages:
| Input | Value |
|---|
| Average order value | $70 |
| Purchases per customer per year | 3 |
| Years a customer stays | 2 |
| Gross margin | 50% |
| Result | Calculation | Value |
|---|
| Lifetime revenue | $70 × 3 × 2 | $420 |
| Lifetime gross profit | $420 × 50% | $210 |
| Suggested max acquisition cost | $210 ÷ 3 | $70 |
The first order alone only earns $35 in gross profit, so judging ads by first-order profit would cap acquisition cost at $35. Accounting for repeat purchases, the store can reasonably spend up to $70 to acquire a customer.
CAC vs CPA
CAC (customer acquisition cost) is the total marketing and sales cost of winning a new customer, divided by new customers only. CPA in Google Ads is ad spend per conversion, and it includes purchases from returning customers. For LTV:CAC comparisons, use CAC. For bidding, use CPA, which you can set with the target CPA calculator.
Interpreting your LTV:CAC ratio
The 3:1 ratio is a guideline, not a law. How you read your ratio depends on your situation:
- Below 1:1 means you lose money on the average customer, even counting repeat purchases.
- Around 1:1 to 2:1 can work for fast-growing stores willing to trade profit for growth, but leaves little margin for error.
- Around 3:1 is a widely used target that balances growth and profitability.
- Well above 3:1 may mean you are underinvesting in acquisition and could grow faster.
Also consider payback time. A customer worth $210 over two years does not return that profit immediately. If cash is tight, how fast you recover the acquisition cost matters as much as the ratio.
Your result is only as good as your estimates:
- Purchases per year: take total orders in a year divided by unique customers in that year.
- Years as a customer: if you lack long history, be conservative. Overestimating lifespan is the most common way LTV gets inflated.
- Segment it. Customers acquired through Google Shopping, email or discounts may behave very differently. Compare LTV by acquisition channel if your data allows.
How to increase customer lifetime value
- Raise repeat purchase rate with post-purchase email flows, replenishment reminders and loyalty perks.
- Offer subscriptions for consumable products.
- Increase AOV with bundles and cross-sells; the AOV calculator helps track it.
- Improve the first experience. Fast shipping, accurate product pages and easy returns make a second order much more likely.
- Bid for new customers. Google Ads offers customer acquisition settings in Performance Max and Shopping that can value or prioritize new customers, which fits a strategy built on LTV.