Level 4 · A simple predictive LTV

From history to a forecast

Historic LTV only covers customers who have already had time to buy. Planning needs a number for a customer acquired today. The classic back-of-envelope formula multiplies three things:

• AOV, net revenue per order;
• purchase frequency, orders per active customer per year;
• expected lifespan, how many years a customer keeps buying.

AOV × frequency is what an active customer spends in a year. Times lifespan, it is what they spend in total.

Lifespan from churn

Nobody observes lifespan directly; it comes from churn. If a share c of this year’s customers does not come back next year, and that share stays constant, the average customer stays 1 / c years. Of the 1,003 customers with a booked order in 2024, 238 have none in 2025: annual churn is 23.73%, so the expected lifespan is 4.21 years.

-- 2024 buyers with no 2025 order
FROM c24 LEFT JOIN c25 USING (customer_id)
WHERE c25.customer_id IS NULL

Revenue LTV and margin LTV

With 2025’s AOV of $503.82 and 3.01 orders per buyer, revenue LTV is $6,385.71. But the store does not keep revenue: it pays for the products. Multiplying by the gross margin rate (53.84% of 2025 net sales on kept lines with a known product cost) gives the margin LTV, $3,438.07. That is the number to set against acquisition cost, because CAC is paid out of margin.

What the formula assumes

Every input is an average, and the formula assumes they stay fixed for years: same basket size, same frequency, a constant churn rate. Reality breaks each one. New customers buy less often than the loyal base that dominates the 2025 frequency, churn is usually highest in a customer’s first year, and 4.21 years is longer than the data itself. Treat the result as an order of magnitude, and show how much it moves if churn is 30% instead of 24%.

Common mistakes

• Rounding the inputs first. Rounded AOV, frequency and lifespan multiplied together give $6,384.46, more than a dollar off. Round only the outputs.
• Frequency over all customers ever. Orders per year must divide by customers active that year.
• Calling revenue LTV “profit”. It is not; say which version you report.

Interview note

“How would you estimate LTV for a new e-commerce store?” Give this formula, say that lifespan comes from 1 / churn, switch to margin, and name the assumptions. That is a complete answer.