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Measurement and metrics

LTV (customer lifetime value)

Also called customer lifetime value, CLV, lifetime value.

Short answer

LTV (customer lifetime value) is the total value a customer is expected to create over the whole customer relationship – not just at the first purchase. A web shop calculates LTV as average order value times purchase frequency times lifetime, and the figure sets the ceiling for what a new customer may cost.

Definition of LTV (customer lifetime value).

LTV answers a different question from a single order: what is the whole customer relationship worth? A customer who buys once for DKK 400 and a customer who buys 3 times a year for 2 years look the same in the order statistics on day one – but represent DKK 400 against DKK 2,400 in revenue. Without lifetime value in the calculation, customers who buy again are systematically undervalued.

In affiliate marketing, LTV is the link between commission and business. A store that only calculates on the first order might see DKK 120 in contribution margin and set the commission accordingly – and the program attracts no one. Calculate on lifetime value instead, and a commission that eats the entire profit of the first order can still be good business, because the customer comes back. Affiliates use the same logic: programs behind products with repeat purchases can carry higher rates and recurring models.

How to calculate LTV

For a web shop: average order value × number of purchases per year × number of years as a customer. The customer from before: DKK 400 × 3 purchases × 2 years = DKK 2,400 in lifetime revenue. If the figure is to be used to set budgets or commission, multiply by the gross margin – at 30 % the customer's lifetime earnings are DKK 720. That is the amount customer acquisition and commission have to be paid from.

For subscriptions: monthly revenue per customer divided by the monthly churn rate. A subscription at DKK 99 a month with 5 % monthly churn gives DKK 1,980 in expected lifetime revenue, because the average customer stays for 20 months. If churn falls to 4 %, LTV rises to DKK 2,475 – small improvements in retention move the figure more than most campaigns.

LTV vs. AOV

AspectLTVAOV
Measuresthe value of the whole customer relationshipthe value of an average order
Time horizonmonths to yearsone purchase
Used forsetting the ceiling for customer acquisition and commission levelassessing basket size and individual orders

AOV tells you what an order is worth, LTV what the customer is worth – commission and ad budgets should be set on the latter.

How it goes wrong

  • 01

    Revenue counted as earnings

    An LTV of DKK 2,400 in revenue is not DKK 2,400 to buy customers with. Without the gross margin in the calculation, the ceiling for customer acquisition is set far too high, and every new customer becomes a loss-making deal that is only discovered in the accounts.

  • 02

    One average for all customers

    Customers from different channels behave differently: some segments churn after a month, others stay for years. A single LTV average prices both wrongly. Calculate LTV per channel and segment before making commission or advertising decisions on the figure.

  • 03

    The forecast is mistaken for money

    LTV is an expectation about the future, not money in the bank. If churn, prices or the product range change, LTV changes immediately – a figure calculated on last year's customers can be wrong for next year's. Recalculate regularly.

At Affilyflow

LTV (customer lifetime value) in practice

If the store sells subscriptions, the commission can be set as a recurring commission, so the affiliate earns on renewals and thereby shares in the lifetime value the customer actually creates. The agreement holds all the way: an ongoing recurring agreement cannot be cut afterwards, and the rate is locked at the moment of the click.

Frequently asked questions

How do you calculate customer lifetime value?

For web shops: average order value times the number of purchases per year times the number of years as a customer – multiply by the gross margin to get earnings instead of revenue. For subscriptions: monthly revenue per customer divided by the monthly churn rate. Both are forecasts and should be recalculated regularly.

What is the difference between LTV and CAC?

LTV is what the customer brings in; CAC is what the customer cost to acquire. The ratio between them decides whether growth is healthy – a commonly used rule of thumb says LTV should be at least 3 times CAC. In the affiliate model, the commission is part of CAC.

Why does LTV matter for affiliate commission?

Because the commission is paid from the first order, but the customer often buys again. A store that knows its LTV can set a rate that is attractive to affiliates without losing money – and an affiliate can see why products with repeat purchases and subscriptions can carry recurring commission.

What is a good LTV?

There is no universal figure – LTV only makes sense measured against the customer acquisition cost and the margin in the specific business. An LTV of DKK 500 is excellent if customers cost DKK 100 to acquire, and terrible if they cost DKK 400.

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