What LTV changes in acquisition
ROAS and CPA judge a campaign on the first order. For a business where customers come back, that is a scoping error: an acquisition that loses money on the first sale can be very profitable over three years.
Example: a customer acquired for €60 places a first order of €50 at a 40% margin, which is €20 of margin. On the first order, the acquisition loses €40. If they order four times in total, they generate €80 of margin, €20 more than their acquisition cost.
That is the whole point of LTV: it sets the maximum acquisition cost a brand can afford. Ignoring it leaves the field open to competitors who calculate it, and who can therefore bid higher.
The mistakes that inflate LTV
Revenue instead of margin. An LTV based on revenue overstates value all the more as the margin is low. It is cumulative margin that should be compared with acquisition cost.
A duration with no limit. A “lifetime” LTV assumes you know how long a customer stays, which a young brand does not. A 12- or 24-month LTV, observed on real cohorts, is less flattering and far more useful.
One average for every channel. Customers acquired through an aggressive promotion do not necessarily behave like the others. An average LTV applied to every channel can overpay for the ones that bring in the least loyal customers.
LTV and cash flow: the payback period
LTV tells you how much a customer will bring in, not when. Paying for acquisition up to the level of LTV means fronting the money for the entire payback period. The payback period, the time it takes for cumulative margin to cover the acquisition cost, matters as much as LTV itself.
Two businesses with the same LTV can therefore sustain very different acquisition costs: the one that earns back its outlay in two months can speed up, while the one that takes eighteen months has to finance it.
In ad platforms, LTV is put to use by sending a conversion value that takes it into account, for example a higher value for new customers. The algorithm then looks for the customers worth the most over time, rather than one-time buyers.
Frequently asked questions
How do you calculate LTV?
Multiply the average order value by the average number of orders over the chosen period, then by the margin rate. A €50 order, four orders over two years, and a 40% margin give an LTV of €80 in margin over two years.
What is the difference between LTV and CLV?
None in substance: both acronyms refer to the value of a customer over their whole relationship with a brand. CLV, for customer lifetime value, makes it explicit that we are talking about a customer; LTV is the short form.
What LTV to acquisition cost ratio should you aim for?
There is no universal ratio: it depends on your margin, your cash position, and the payback period you can finance. A ratio that looks comfortable on paper can endanger a business that earns back its outlay too slowly.
How do you use LTV in bidding?
By sending the platforms a conversion value that reflects long-term value rather than just the amount of the first order, then bidding with a target ROAS. The algorithm learns to favor the customers who will come back.