LTV

Lifetime value (LTV), also called customer lifetime value, is the total value a customer brings across their whole relationship with you, not just on the first purchase. For a gym it might be 14 months of membership. For a dentist it might be a first exam plus years of cleanings. The more useful version counts gross profit, meaning revenue minus the cost of delivering the product or service, because only profit can pay for advertising. Revenue-based LTV overstates what you can afford to spend. Contribution, not just margin, is the best base for an honest figure. Subtract support costs, payment fees, and the cost of fulfilling repeat orders. A subscription with a high gross margin but heavy support can have a modest LTV.

LTV is a forecast. It assumes how long customers stay and how often they come back, and a young business has little history to base that on. A common approach is average order value times purchases per customer times the margin, over a fixed period such as 12 months. Pick a period you can observe and be cautious about extending it. Segment by acquisition source if you can, because customers from a discount offer often retain differently from customers who found you by search. Cohorts make the number more trustworthy. Group customers by the month they first bought and track what each group spends after 3, 6, and 12 months. Cohorts show whether newer customers are as valuable as older ones, which a single average hides.

The reason to know LTV is to set the ceiling for acquisition cost. You compare it with customer acquisition cost (CAC), the ad and sales cost to win one customer. Google Ads builds this idea into its customer lifecycle goals. New Customer Value mode bids higher for new customers than existing ones, works with value-based bidding (Target ROAS or Maximize conversion value), and Google recommends it for advertisers with purchase conversion goals. You can also set a higher value for high-value new customers, such as those who buy twice as much as others. Google's lifecycle goals need your own data to work. You provide customer lists and a website tag so the system can tell new from existing customers, and the platform then adjusts bids using the values you assign, not a lifetime value it computes itself.

Common mistakes: using revenue instead of gross profit. Using optimistic retention from your best cohort. Counting customers who would have returned anyway. Setting the bid target to full LTV so you break even on the whole relationship and wait a year for any cash. Forgetting that cash flow matters: a business that pays for ads this month and earns the profit over eighteen months needs the money to wait. And treating one LTV for the whole business when product lines differ a lot. Payback period belongs next to LTV. If a customer returns slowly, you may be profitable over two years yet short of cash in the first six months, and ad budgets are spent today. Many small firms set a CAC limit by payback, not by lifetime.

To work it out this week, pull the last 12 months of customers who first bought at least a year ago, sum their gross profit, and divide by the number of customers. Use that as your observed LTV. Decide what share of it you will spend to acquire a customer, and write the number down as a maximum CAC. Then check actual CAC by channel against it. If you use Google's lifecycle goals, supply customer lists so new and existing customers are defined from your own data. Recalculate at least twice a year. Pricing, product mix, and retention drift, and an LTV figure from last year can quietly authorize spending that no longer makes sense.