What is Lifetime Value (LTV)? (And Why It's the Most Important Success Metric for Ecommerce)

Customer Lifetime Value (LTV) answers a key question for every ecommerce business: How much is a customer worth to our business over the long run?

In ecommerce, LTV is the total revenue or profit a single customer will generate over their entire relationship with your business. It's the expected total income from a typical customer's future interactions with your brand.

For ecommerce brands, knowing your LTV is like having a north star for decision-making. It guides how much you can spend on acquiring customers. It shows where to focus your marketing. And it reveals which customers deserve the most attention.

Online advertising costs are rising. Competition is fierce, and understanding LTV has never been more important. It shifts your mindset from "How many sales did we get today?" to "How can we keep customers coming back for years?"

This perspective makes the difference between a one-hit-wonder store and a sustainable brand.

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What Exactly Is LTV and How Do You Define It?

Lifetime Value (LTV) is the total value a customer brings to your business from their first purchase to their last.

Some businesses calculate LTV using gross profit rather than revenue. This means total revenue minus cost of goods and direct costs - showing the true profit contribution of each customer.

Despite the name, "lifetime" doesn't usually mean the customer's entire lifespan. Most ecommerce brands measure LTV over a fixed period. This could be 12 months, 24 months, or 3 years from the first purchase.

Choose a timeframe that makes sense for your business. A subscription snack box might use a 12-month LTV. A mattress brand with rare purchases might consider the first purchase as the full LTV.

Always specify the time frame when you quote an LTV figure. Say "12-month LTV of a 2023 cohort is $X."

The Simple LTV Formula

A basic formula for LTV is:

LTV = Average Order Value × Purchase Frequency × Customer Lifespan

This means: how much they spend per order, times how many orders per period, times how long they stay a customer.

Example: Your average customer spends $50 per order. They order 3 times a year. They stay with you for 2 years. Their LTV would be $50 × 3 × 2 = $300.

Modern analytics improve this by using cohort data. Track customers who first purchased in Q1 2024. See how much revenue they generated by Q1 2025. This gives you a 12-month LTV for that cohort.

Why Does LTV Matter for Growth and Profitability?

Here's why LTV is vital for ecommerce businesses:

LTV Guides Smart Customer Acquisition

LTV works symbiotically with Customer Acquisition Cost (CAC). Together, LTV and CAC tell you if your customer acquisition strategy works.

Say your average customer will spend $300 over their lifetime. Your profit margin on that is $150. You now have a cap on what you can pay to acquire a customer.

The LTV:CAC ratio is a key metric for many ecommerce businesses. It compares customer value to acquisition cost. A healthy ratio is above 3:1 after three years in business.

If your LTV:CAC is 1:1 or below, you have a problem. You're spending as much to acquire customers as they ever spend with you. This is not sustainable.

Companies also track payback period. This is how many months until a customer's profit covers the CAC. In fashion retail, top brands recover acquisition costs within 1–2 months. Repeat purchases often drop after 5 months.

In food and beverage, some brands wait up to 6 months for payback if customers have strong repeat rates.

LTV Shifts Focus to Retention

Early-stage brands often focus on acquiring new customers. But digital ad costs have risen. Privacy changes have made targeting harder.

Smart brands now focus on retaining existing customers as much as acquiring new ones.

Acquiring a new customer can cost 5-25× more than retaining an existing one. Repeat customers tend to spend more and convert more easily.

Bain & Company found that increasing customer retention by just 5% can boost profits by 25% to 95%. This is a huge opportunity.

Recent data shows companies now spend 53% of marketing budgets on existing customers. Only 47% goes to acquisition. This is a historic shift toward retention-focused marketing.

Why? Repeat customers drive profitability. They often generate most revenue for mature brands. On average, 65% of a company's business comes from repeat customers.

Understanding LTV helps you see that the second, third, and fourth purchases are where profit is made. Not just that first sale.

LTV Informs Product and Marketing Strategy

Analyzing LTV reveals which customer segments, products, or channels produce higher lifetime value. You can then double down on what works.

Example: Harper Wilde discovered that customers who bought non-underwire bras first had much higher long-term value than those who first bought underwire bras.

With this insight, the brand could adjust marketing. They could feature the high-LTV product in ads. Or make it a starter offer to attract better customers.

You might find customers from email referrals have higher LTV than those from discount sites.

LTV helps answer key questions:

• Which acquisition channels bring the best customers?
• Which products create loyal customers?
• What's the quality of customers this campaign brings?

Smart marketers look at long-term value per channel. Sometimes a channel with higher CAC works if those customers stick around longer and spend more.

Read more: 11 Proven Ways to Increase Customer Lifetime Value for Ecommerce Stores

How Do You Calculate and Benchmark LTV?

To use LTV effectively, you need to measure it and understand the key metrics.

Basic LTV Calculation

Use the formula mentioned earlier:

LTV = Average Order Value × Average Purchase Frequency × Average Customer Lifespan

Example: Customers spend $75 per order and make 4 purchases over two years. LTV = $75 × 4 = $300 over 2 years.

This approach works for quick estimates.

Cohort Analysis for Better Accuracy

Companies often calculate LTV by analyzing cohorts. A cohort is customers acquired around the same time. Like all customers who first purchased in January 2023.

Track each cohort's spending over time. See how much value they generate and how quickly.

You might find:

• 90-day LTV (first 3 months): $50
• 6-month LTV: $80
• 1-year LTV: $100

This shows most repeat purchases happen within the first year.

The first 2–3 months after acquisition are critical. Customers who don't return in this window rarely become high-LTV buyers.

Key Metrics That Drive LTV

LTV depends on several underlying metrics:

• ‍Average Order Value (AOV): How much customers spend per order. Increase AOV through upselling, bundles, or free shipping thresholds.‍
• Purchase Frequency/Repeat Rate: How often customers buy in a given period. Measured as orders per customer per year. Or as Repeat Purchase Rate (percentage who make more than one purchase).‍
• Customer Lifespan/Retention Rate: How long customers keep buying. Can be expressed as time ("customers stay 18 months on average") or retention metrics.‍
• Retention rate: The percentage of customers who remain active.
• ‍Churn rate: The percentage who stop buying.‍
• Gross Margin: If calculating profit-based LTV, factor in gross margin (selling price minus cost of goods, shipping, etc.).

Typically, any improvement in the above metrics will also provide a boost in LTV. If customers spend more in each order, their lifetime value goes up. So too if they buy more often, or fewer customers stop buying (i.e. churn).

What Do LTV Benchmarks Look Like Across Industries?

"Good" LTV varies by industry. Here are recent benchmarks across ecommerce verticals:

Fashion and Apparel

Fashion brands see moderate repeat rates. Median fashion brands' LTV curves flatten around 5 months. Top-performing fashion brands earn about $59 more per customer by month 12.

In one dataset, apparel retailers had about a 20.2% second-purchase rate within the same year. This means only around 1 in 5 first-time buyers made a second purchase in that year (the rest were one-and-done).

Health and Beauty

Beauty brands enjoy higher repeat rates. Customers replenish products like cosmetics or skincare if they like them.

Health/beauty brands had the highest conversion to second purchase – about 21.5% of new customers make a second purchase within that year.

Top beauty brands in one benchmark added about $40 extra LTV per customer by month 12 compared to average brands.

Many DTC brands aim to break even on CAC within Month 1. High gross margins mean even one repeat purchase can make a customer profitable.

Food and Beverage

This category can have frequent purchase cycles but struggles with long-term retention. Customers might tire of subscriptions or have many alternatives.

Median food and beverage brands see customers stop reordering by Month 6.

Top performers keep growing LTV beyond Month 12. The best food and beverage brands make $40 more per customer in the first year than the median.

Strong brands can have longer payback periods (6+ months) because customers stick around.

Home Goods and Furniture

This ranges from low-cost decor to big-ticket furniture. Purchase frequency is naturally lower.

Home & Garden brands showed the highest potential LTV among Shopify verticals. Top brands earn almost 3x the revenue in Month 1 and ended with $122 more per customer by Year 1.

This suggests successful home goods brands excel at upselling and cross-selling. They might sell room redesign suites upfront. Or use initial purchases to drive complementary item sales.

Health and Wellness Supplements

Supplements have seen strong LTV growth recently. Data from Q1 2024 showed supplement brands had a 37.7% repurchase rate (up from 33.1% the prior year).

Their retention rate was about 23.4% vs 19% the year before. This beat growth in fashion, beauty, or food.

The driver? Heavy use of subscriptions and loyalty programs. Many supplement brands offer monthly auto-ship, which locks in repeat revenue.

How Do Successful Brands Leverage LTV in Practice?

Smart ecommerce companies build LTV thinking into their growth strategies. Here are some notable examples:

HelloFresh: Predictive LTV Models

HelloFresh uses predictive LTV models to guide marketing spend. They forecast how much a new subscriber will be worth using machine learning. Then they adjust Google and Facebook ad bids accordingly.

They bid more for customers predicted to have high LTV (like family plan subscribers who might stay 12 months). They bid less for those likely to churn early.

The company states: "Understanding the long-term value of customers is crucial… by forecasting this metric, we can make smarter decisions on how we allocate marketing resources for maximum impact."

This approach optimizes for profitable growth rather than just cheap customer acquisition.

Sephora: Beauty Insider Loyalty Program

Sephora's Beauty Insider loyalty program is retail gold standard. It massively increases customer lifetime value.

Sephora has over 25 million loyalty members. Members account for about 80% of Sephora's sales. Members also spend 3x more on average than non-members.

Sephora creates a tiered rewards system (Insider, VIB, Rouge) that incentivizes higher spending with exclusive perks. Think deluxe samples, early access to products, free beauty classes.

This gamification drives both frequency and AOV up. Customers strive to reach Rouge status by spending $1,000/year.

Chewy: Autoship and Exceptional Service

Chewy is known for great customer service and a successful subscription model (Autoship).

Autoship lets customers get pet supplies delivered on schedule with a small discount. This boosts LTV by increasing purchase frequency and locking in repeat revenue.

Chewy's Autoship helped achieve a roughly 70% customer retention rate – extremely high in retail.

Chewy goes above and beyond. Handwritten holiday cards. Flowers when a customer's pet dies. 24/7 support. Easy returns.

This customer experience focus builds trust and long relationships. Chewy turned one-off pet food purchases into multi-year subscription relationships.

How Can You Start Tracking and Improving Your LTV?

Improving LTV comes down to doing many things right for your customer. Here's a practical framework:

Measure Your Baseline LTV and Key Metrics

Start with data you have. Use Shopify apps or built-in reports to find repeat purchase rate, average orders per customer, and LTV for customer cohorts.

Simple spreadsheet analysis works too. List all customers acquired in 2022. Sum how much each spent through 2023. Average it. That's your approximate 1-year LTV for 2022 cohort.

Identify your repeat purchase rate. What percentage of customers have 2+ orders, 3+ orders, etc.? If 70% never reorder, that's your starting point.

Check your time to second order. If repeat customers typically take 45 days for their second purchase, engage them heavily in that first 45-day window.

Track 90-day, 180-day, and 1-year LTV for cohorts. These short-term numbers are actionable.

Identify High-Value vs Low-Value Segments

Not all customers are equal. Some have 10x the LTV of others. Segment customers by value.

Split last year's customers into quartiles: top 25% (VIPs), middle, bottom 25%. What patterns do you see?

Maybe VIPs all bought from a certain category. Or came through a particular campaign.

Use RFM analysis – ranking customers by Recency, Frequency, and Monetary value. This highlights "champion" customers versus "at risk" ones.

Optimize the Early Customer Experience

The biggest drop-off is between first and second purchase. On average 74% of new customers are one-and-done. Convert more first-time buyers into repeat buyers.

• ‍Strong Post-Purchase Follow-up: Don't treat first orders as transaction endings. They're relationship beginnings. Send great confirmation emails. Message when products deliver. Follow up weeks later.‍
• Personalize Early: Use first purchase learnings to personalize offers. Baby clothes buyers and men's shoe buyers should get different follow-ups.‍
• Capture Zero-Party Data: Engage new customers with quizzes or preference centers. Gather information they willingly share about preferences.‍
• Fast, Friendly Service: Early relationship experiences decide if customers return. Good or bad service can make or break future purchases.

Use Retention and Upsell Tactics

Once basics are in place, use strategies to lift LTV:

• ‍Loyalty Programs: Simple punch cards ("10th purchase free") or elaborate tiered rewards. Reward repeat business.‍
• Subscription Options: For recurring products (coffee, pet food, vitamins, beauty), add subscription or "auto-ship" options.‍
• Cross-Sell and Upsell: Increase average order value to boost LTV. Offer related products or upgrades.‍
• Expand Product Lines: Meet more customer needs. Give them reasons to return and buy again.‍
• Reactivation Campaigns: Target customers who haven't purchased recently. Win them back proactively.

Launch a Mobile App

Your best customers want to come back, they want to spend more money with you. You're just not making it easy for them.

A mobile app does that.

Apps are retention machines. They make it easy to come back, give your brand a natural touchpoint (on your customer's device), and a cheap, direct communication channel in push notifications.

Mobile apps are proven to increase repeat purchase rates, customer retention, AOV, and engagement time - all of which leads to significantly higher LTV.

Any ecommerce brand can launch their own app and boost LTV, with no rebuilding, no hiring developers, and virtually no overhead, with MobiLoud. Want to see how? Get a free preview of your app now.

The LTV Trap

LTV is a powerful metric. But like any metric, solely focusing on LTV (without taking in a wider context) is dangerous.

The "LTV trap" is overspending on paid acquisition because “LTV will pay it back.”

Here's how to avoid this:

• Measure margin-LTV (not revenue-LTV). Look at the real profit per customer.
• Track and optimize other metrics alongside LTV.
• Track your payback window (as a rule of thumb, you should be making a profit from customers within two quarters at the most).
• Only scale acquisition channels with a manageable payback window.
• Compare actual net dollars collected to CAC every month; ignore “forecast” curves until they’re earned.

The key is to ensure you're not waiting a long time to pay back the cost of acquisition (unless your business model is specifically built around long payback periods.

Building Your Brand With LTV as the North Star

Customer Lifetime Value isn't just another metric to track on your dashboard. It's arguably the most important metric.

Total sales or website traffic looks great on a dashboard or a social media post, but the true value you're getting from each customer is what matters.

Higher LTV means more return from your acquisition spend, and a more stable business.

There is danger in focusing only on LTV, while blocking out everything else. But using LTV as your North Star is a smart way to run an ecom brand.

Treat your customers as long-term partners, not one-time transactions. That's how sustainable, profitable businesses work.