LTV

When you look at a customer, it is tempting to see only what they spent on their first order. LTV, or lifetime value, is the fuller number: what that one customer is worth to your business across every purchase they make with you over time, not just the day they showed up.

The plain-words version is simple. You take the average order value, which is what a typical order is worth, and you multiply it by the number of orders a customer places over their life with you. So say each order is worth 1,500 rupees, and a customer comes back and buys 4 times before they drift away. That customer is worth 1,500 times 4, which is 6,000 rupees to you, even though the first order only put 1,500 rupees in the till.

Put in your own average order value and how many times a real customer tends to buy, and read the lifetime value it gives you.

This is the number that lets you afford to win customers. If a customer is only worth their first 1,500 rupees, you cannot pay much to acquire one. But if they are worth 6,000 rupees over time, you can pay far more than 1,500 to bring one in and still come out ahead. This is exactly where LTV meets your cost to acquire a customer and sets the breakeven line you are allowed to spend up to.

Here is the catch. LTV is a forecast, not cash sitting in your bank account. You are guessing how many times a customer will buy before they actually do it, so use a sober estimate rather than the happy one. And my honest view: the number that matters is profit-based LTV, what is left after the cost of the product, not revenue LTV. Revenue LTV flatters you because it counts money you never keep. That is my judgement, not a law, but I would trust the profit number every time.

Your first order tells you what a customer cost you today; LTV tells you what they are worth if you keep them.