Customer analytics guide
Shopify customer lifetime value, explained
Customer lifetime value tells you what a new customer is really worth, and therefore how much you can afford to spend to win one. This guide shows three ways to calculate it for a Shopify store, from a quick estimate to a cohort view you can trust.
Written by Malick Alexandre Sarr, co-founder of Avantages. Published on . About 8 minutes to read.
What is customer lifetime value?
Customer lifetime value, or LTV, is the total value a customer brings over their whole relationship with your store. It can be measured in revenue or in gross profit. Gross profit is the better choice for budget decisions, because revenue ignores what the products cost you.
LTV matters because most brands lose money or break even on a customer’s first order. The second, third and fourth orders are where the profit is.
The simple LTV formula
The quickest estimate multiplies three numbers: average order value, the number of orders a customer places per year and the number of years a customer stays. Multiply the result by your gross margin to get gross-profit LTV.
For example, a $70 average order, 2.2 orders a year and a 3-year lifespan give a revenue LTV of $462. With a 60% gross margin, that is a gross-profit LTV of about $277.
The simple formula is useful for a first estimate, but it assumes every customer behaves like the average one, and the lifespan is usually a guess.
Cohort-based LTV
A more reliable method follows real customers. Group customers by the month of their first order, then add up the revenue each cohort brought in over time and divide it by the number of customers in the cohort. The result is the actual value per customer after 30, 90, 180 and 365 days.
The table below shows illustrative numbers. Comparing cohorts tells you whether newer customers are worth more or less than older ones.
| First-order month | After 30 days | After 90 days | After 180 days | After 365 days |
|---|---|---|---|---|
| January | $74 | $98 | $121 | $156 |
| April | $71 | $95 | $117 | Not yet |
| July | $69 | $90 | Not yet | Not yet |
LTV to CAC and payback period
LTV on its own does not tell you whether your marketing works. Compare it with customer acquisition cost (CAC), what you spend to win one new customer.
- LTV to CAC ratio: gross-profit LTV divided by CAC. Many brands aim for 3 or more, but the right target depends on your cash position and growth plans.
- CAC payback period: how many months of gross profit it takes to earn back the CAC. A shorter payback means you can reinvest in growth sooner.
- In the example above, a CAC of $45 against about $7.70 of gross profit per customer per month pays back in about 6 months.
Common LTV mistakes
- Using revenue LTV to set ad budgets, which ignores product and shipping costs.
- Assuming a lifespan that your data has not shown yet.
- Mixing customers from very different channels or first products into one average.
- Counting customers who placed one order a long time ago as still active.
Lifetime value in AvantagesComing soon
Predicted lifetime value by channel
Cohort retention is live in Avantages today, so you can already follow how each group of new customers comes back. Predicted lifetime value by acquisition channel is coming next.
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