Definition: LTV, which stands for "lifetime value," is a business metric that estimates the lifetime net profit from every paying customer. Online stores strive for high customer LTV and retention, which lowers the cost of acquisition and increases average order value.

Why online businesses should know their LTV

LTV, or CLV (customer lifetime value) is an indicator of how effective a business is at providing a quality customer experience. While customers placing one high-value order is undoubtedly good, multiple orders by the same customer are a sign of true brand loyalty. Ecommerce stores looking to master a niche strive for a high customer LTV and retention rate. Not only are loyal customers highly valuable in and of themselves — they are more likely to refer new customers. The term LTV was first coined in Database Marketing, a popular business book published in 1988.

Using LTV to inform marketing spend

LTV is an important concept as it expands an online business' vision from quarterly, short-term profits to the reciprocal long-term value of every customer. With a clearly defined LTV, a business can effectively plan for years into the future rather than merely focusing on myopic short-term goals.

With an accurate predictor of what every paying user will spend on average, a business can strategically determine how many marketing dollars should be spent to acquire additional customers. LTV is commonly used to weigh the appropriateness of the cost required to acquire future customers.

As an example, if an online business calculates that a new customer costs $17 to acquire and his or her lifetime value is $45, the business can label that customer as profitable. Lifetime value can be segmented by user type, further informing marketing spend and helping companies hone in on the ideal customer.

Other ways to leverage LTV

Knowing LTV allows a business to study the impact of certain marketing and/or management strategies. Many companies rely on marketing modeling simulators to display the true value (rather than the acquisition cost) of additional customers. LTV is also quite helpful when it comes to enabling businesses to focus on long-term customer acquisition rather than spending resources to acquire low-cost customers who do not significantly boost revenue. The metric is also commonly used to determine customer loyalty in terms of:

  • Purchase frequency
  • The probability of purchases
  • Proportion of purchase

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