LTV (lifetime value) is how much profit a customer brings over the whole relationship with the store. For an online store, you calculate it from margin, not revenue, and compare it with customer acquisition cost (CAC). That tells you how much you can afford to spend on ads.
Why a store needs LTV
Without LTV, ads are judged by the first order. Then a channel that brings customers with a single €50 order looks better than one where the first order is €30 but customers come back five times. LTV shows what a customer is really worth and helps you decide how much to pay to acquire one.
The second use is comparing segments. The LTV of coffee buyers and coffee machine buyers can differ several times over, and the strategy for each should differ too.
The simple formula
In simplified form: LTV = average order value × average number of orders per period × margin. Example: average order value €40, the customer places 3 orders on average over two years, margin 35%. LTV = 40 × 3 × 0.35 = €42 of gross profit over two years.
Limit the period. A "lifetime" value over ten years is useless for deciding on this quarter's ads. Most stores use 12 or 24 months.
Cohort calculation
A more accurate method is to work by cohorts: a group of customers who made their first order in the same month. For each cohort, add up the margin from all of its orders over 1, 3, 6 and 12 months and divide by the number of customers. You get a curve that shows how fast customers pay back and when they stop buying.
| Months after the first order | Cumulative margin per customer (example) |
|---|---|
| 0 (first order) | €14 |
| 3 | €20 |
| 6 | €26 |
| 12 | €34 |
What to include in margin
- Product price minus cost of goods.
- Minus shipping paid by the store.
- Minus payment processing and marketplace fees.
- Minus the cost of returns.
- Plus extra income per order: services, partner payouts, if you have them.
LTV and CAC
CAC is the cost of acquiring one new customer: channel spend divided by the number of new customers from it. The LTV / CAC ratio shows whether a channel pays off. If 12-month LTV is below CAC, the channel loses money over that horizon, even if revenue is growing.
Also look at the payback period: after how many months a customer's cumulative margin exceeds CAC. For a store with limited working capital, this matters more than the final ratio.
Common mistakes
- Calculating LTV from revenue instead of margin.
- Averaging across the whole store instead of calculating by category and channel.
- Using an endless time horizon.
- Ignoring returns and discounts.
- Comparing the LTV of old cohorts with today's ad CAC without adjusting for price changes.
How to increase LTV
There are three levers: more orders per customer, a higher margin per order and a longer customer lifetime. The first works through replenishment reminders and a loyalty program. The second works through average order value and extra income on every order. The third works through service quality and win-back.
Extra income per order is often forgotten. If every thank-you page earns, say, €0.10 from partner offers, that is added margin on every order without changing your prices. This is how ThanklyClub works: the store receives 60% of the payout for each new partner customer.
How to use LTV in decisions
- Ad bids: the maximum price for a customer is a share of LTV over the chosen period, not the margin on the first order.
- Channel choice: compare the LTV of customers from different channels, not just the cost of the first order.
- Assortment: categories with high LTV deserve promotion for acquiring new customers.
- Retention: if the cohort curve flattens quickly, work on the second order.
- Discounts: a welcome discount is justified if it lowers LTV by less than it lowers CAC.
Example: calculation by segment
Say a store has two groups. Coffee buyers: average order €25, 6 orders a year, margin 30%, so 12-month LTV is €45. Coffee machine buyers: average order €300, 1.2 orders a year, margin 15%, so 12-month LTV is €54. The numbers are illustrative, but the difference in structure is clear. In the first case frequency is what matters. In the second it is accessories and extra income on a big order.
LTV for a small store
If you have few orders, cohorts will be noisy: 30 new customers one month, 50 the next, and chance affects the result a lot. In that case, group months into quarters and calculate LTV over 6 or 12 months, not 3.
Don't aim for accuracy to the cent. You need the order of magnitude: does the channel pay off, roughly how much can you pay for a customer, which segment is worth more. Even a rough calculation beats decisions based on the first order alone. Recalculate LTV once a quarter and after noticeable changes in prices or assortment.
What else affects LTV
The quality of the first order, delivery speed, easy returns and support affect LTV more than you might think, because they decide whether there is a second order at all. If LTV is falling, check these first, and only then look at loyalty programs and discounts.
Where to get the data in WooCommerce
WooCommerce Analytics reports show orders and customers, but it does not build cohorts by margin. A practical route is to export orders with email or customer ID, date, amount and cost of goods into a spreadsheet and build cohorts with a pivot table. For regular use, analytics tools that connect to WooCommerce will do.
FAQ
How do I calculate LTV for an online store?
In simplified form: average order value × number of orders per period × margin. For more accuracy, use cohorts: the cumulative margin of a group of customers over 3, 6 and 12 months, divided by the number of customers.
How is LTV different from average order value?
Average order value is the amount of a single order. LTV is the profit from a customer over their whole lifetime or over a chosen period, including repeat orders.
What is a good LTV to CAC ratio?
There is no universal number. What matters is that LTV over the chosen period is higher than CAC with room for fixed costs, and that the payback period works for your working capital.
Should partner income be included in LTV?
Yes, if it is stable. Extra income on every order raises a customer's margin the same way a price increase does.
Over what period should I calculate LTV?
Usually 12 or 24 months. Stores with infrequent purchases can use a longer horizon, but for ad decisions it is more useful to pick a period you are willing to wait for payback.
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