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LTV, or lifetime value (LTV), is the total revenue or profit a business can expect from a single customer across the full duration of the relationship. This page focuses on how the number is actually calculated; for the broader concept, see the lifetime value entry.
Calculating LTV gives you the foundation for every retention and acquisition decision: how much you can afford to spend on customer acquisition cost (CAC), where to invest in retention, and which customer segments are worth doubling down on. The calculation is only complete when LTV is read against CAC, since the LTV:CAC ratio (typically 3:1 as a healthy benchmark) is what tells you whether your unit economics actually work.
The most common LTV calculation formula is:
LTV = Average Order Value × Purchase Frequency × Customer Lifespan
For a more accurate view of profit (not just revenue), multiply by gross margin:
LTV = AOV × Purchase Frequency × Customer Lifespan × Gross Margin %
This matters because CAC is paid out of margin, not revenue, so profit-LTV is the right number to compare against acquisition cost.
Each input has its own formula:
For subscription businesses, the canonical formula is:
LTV = ARPU × Gross Margin % ÷ Churn Rate
Where ARPU is average revenue per user (per month), and churn rate is the percentage of subscribers lost per month. Churn rate is the single biggest input that compresses LTV in subscription models, because shorter customer lifetimes shrink the entire calculation. A simpler, less precise version some teams use is Average Monthly Revenue per Customer × Average Customer Lifespan in months.
DTC store (basic formula): AOV $50, customers buy 4 times per year, average lifespan 3 years. LTV = $50 × 4 × 3 = $600 in revenue. With a 40% gross margin, profit-LTV = $600 × 0.40 = $240.
Subscription business (subscription formula): ARPU $50/month, gross margin 70%, monthly churn rate 5%. LTV = $50 × 0.70 ÷ 0.05 = $700 in profit per subscriber.
To run the calculation on your own store data, use Driftcharge’s LTV calculator.
Match the formula to your business model. The basic AOV × frequency × lifespan formula works for one-time DTC stores; the ARPU × margin ÷ churn formula is more accurate for subscriptions. Whichever you use, calculate LTV in cohorts (customers acquired in a given month) rather than as a single all-time average, and pair it with CAC from the same channel to see which acquisition sources are actually paying back.
