Customer Lifetime Value in Marketing: Calculating and Using LTV

Why LTV Transforms Marketing Decisions

Marketing optimised for first-purchase ROAS optimises for the wrong thing. A customer who purchases once and churns has very different value from a customer who purchases repeatedly for 3 years. If your paid social channel brings high-churn customers and your organic content channel brings loyal repeat customers, optimising toward ROAS favours paid social — a potentially catastrophic error that LTV analysis reveals and corrects.

LTV Calculation Methods

Historical LTV (most accurate): Take a cohort of customers acquired in a given period. Calculate total revenue generated per customer across their entire relationship with your business. Average these across the cohort. For 2-year-old businesses, this gives you 2-year LTV — approximate it forward using retention rates.

Predictive LTV: Use retention rates and average order values to predict forward. For subscription businesses: LTV = Average MRR per customer / Monthly churn rate. For transactional businesses: LTV = Average order value × Purchase frequency × Average customer lifespan.

LTV by Acquisition Channel

This is where LTV analysis generates the most actionable marketing insight. Calculate LTV separately for customers acquired from each channel:

• Organic search customers: purchase frequency and 12-month retention rate
• Paid social customers: same metrics
• Referral customers: same metrics

Combine LTV by channel with CAC by channel to get LTV:CAC ratio by channel. This ratio is the true efficiency measure of each acquisition channel — not ROAS, which only looks at the first transaction.

Using LTV to Set CAC Targets

Target CAC = LTV × (1 / Target LTV:CAC ratio). If LTV for a customer segment is $600 and you target 3:1 LTV:CAC, your target CAC is $200. Any acquisition channel achieving CAC below $200 for that segment is value-positive. Use this to set bid strategies in Google Ads and Meta Ads.

Our marketing analytics service builds LTV models by acquisition cohort and channel, feeding into budget allocation recommendations. Contact us to get LTV-based marketing economics for your business.