Enter average order value, purchases per year, customer lifespan, and margin. Get lifetime revenue, lifetime profit, and a sane ceiling for what a new customer is worth in the auction.
LTV = average order value × purchases per year × lifespan. The ⅓ rule is a conservative starting ceiling for what to pay for a new customer — payback timing and cash flow decide how far past first-order economics you can actually bid.
The classic lifetime value calculation is three numbers multiplied: LTV = average order value × purchases per year × years retained. A $65 order, three times a year, for two and a half years is $487.50 of lifetime revenue. Multiply by gross margin to get lifetime profit — the number you can actually spend against.
Accounts optimized to first-order economics systematically underbid for their best customers. If a first order carries $20 of profit but the customer relationship carries $250, a $40 CPA isn’t a failure — it’s a bargain your first-order dashboard reports as a loss. LTV is the argument for the bids that win those auctions, and the reason subscription and repeat-purchase businesses can outspend everyone else on the same keyword.
Pull the inputs from real order data, not aspiration: AOV and purchase frequency from the last twelve months, lifespan from cohort retention if you have it. The ⅓-of-LTV acquisition ceiling the calculator suggests is a conservative default that leaves room for payback time and cash flow — a business that can wait longer for payback can push closer to full LTV profit.
Multiply average order value × purchases per year × customer lifespan in years for lifetime revenue, then multiply by gross margin for lifetime profit. Use the last 12 months of real order data for the inputs.
A common conservative ceiling is one-third of lifetime profit, which leaves margin for payback time and estimation error. Businesses with strong cash flow and reliable retention data can justify spending closer to full first-year profit.
Bidding to first-order profit underbids for customers who buy repeatedly. Knowing LTV lets you set CPA and ROAS targets that win high-value customers your competitors' first-order math tells them to skip.
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