What is LTV?

Measure it on margin, not revenue

A customer is worth what they leave behind after the cost of serving them, not what they spend. Measure LTV on contribution margin, usually CM2: net revenue minus product cost, fees, shipping and returns. Revenue-based LTV ignores the cost of every order and flatters the result.

If you include the marketing spent to bring customers back, such as retention ads, subtract it too, or say clearly that it is left out.

Two ways to estimate it

1. From cohorts (preferred). Follow a group of customers from their first order and add up the CM2 of all their orders month by month. The total after 12 months is the 12-month LTV. This uses what customers actually did.

2. From averages. LTV ≈ AOV × orders per customer over the period × CM2 per rupee of net revenue. It is quick, but averages can hide falling retention among newer customers.

Either way, state the time frame. "Lifetime" is a figure of speech. A 12-month or 24-month LTV is honest and can be checked. A "lifetime" built on an assumed retention rate for many years is a forecast, not a measurement.

LTV against CAC

• LTV ÷ CAC shows how many times over a customer repays the cost of acquiring them. A higher ratio leaves more room for fixed costs and profit.
• Payback period shows how soon the CAC comes back. Two businesses with the same ratio need very different amounts of cash if one earns its CAC back in two months and the other in twelve.

Compare LTV and CAC for the same group of customers and the same channel, not the business-wide averages.

What moves it

• Repeat rate: product quality, delivery experience and how easy it is to reorder.
• AOV on repeat orders: replenishment packs and subscriptions.
• Margin: returns and RTOs on repeat orders, and discounts used to bring customers back.

Marketplace buyers are usually not visible to the brand, so LTV is mostly measured on website and app customers.