Marketing in a Minute – Episode 16 | Ahmed Moaaz

A customer’s value extends across the whole relationship, not just the first order. A higher LTV can give you room to spend more than competitors on acquiring a customer.

What is LTV?

LTV stands for Customer Lifetime Value: the value a customer contributes throughout their relationship with your business, from first order to last. This article uses a profit-based version rather than revenue alone, so it can be compared meaningfully with acquisition cost.

This changes the way you view a purchase. A customer is not necessarily a single transaction, but a possible recurring relationship. A specialty-coffee business is not just selling an EGP 300 bag. It may be gaining someone who buys each month for three years.

How can you calculate it simply?

A practical starting formula is: LTV = average order value × expected number of purchases × profit margin.

For example, average order value is EGP 400, a typical customer buys 5 times before stopping, and the relevant margin is 30%. LTV = 400 × 5 × 0.30 = EGP 600 of estimated lifetime contribution per customer.

Notice that this calculation uses profit contribution, not revenue. A revenue-only calculation would give EGP 2,000 in the same example and could encourage a very different, potentially unaffordable acquisition budget. Define the margin consistently and avoid deducting acquisition cost twice when comparing LTV with CAC.

How do you estimate the number of purchases?

Use actual records rather than wishful thinking:

• If you have established customer records, examine customers who first bought one or two years ago. How many purchases did each make on average over the observed relationship?
• If the business is new, start with the data available and update the estimate every few months as the records grow.
• Separate very different product types. A monthly subscription customer behaves differently from someone buying a device once every three years.

Why does LTV change acquisition decisions?

It helps establish what you can afford to spend to acquire a customer. The previous CAC example used EGP 250. Against a first-order contribution of EGP 120, the initial transaction looks loss-making. Against an estimated lifetime contribution of EGP 600, the relationship can be profitable if those future purchases actually happen and the business can finance the wait.

A common planning rule is LTV of at least three times CAC. It is a guide rather than a universal guarantee. A lower ratio can leave little room for rising costs or a weaker-than-expected customer relationship. A much higher ratio may suggest room for additional acquisition, subject to cash flow and risk.

A worked example

A supplements store has an average order value of EGP 600 and a contribution margin of 35%. A typical customer buys 6 times in the first year and twice in the second, for 8 purchases in total. LTV = 600 × 8 × 0.35 = EGP 1,680.

CAC is EGP 400. LTV ÷ CAC = 1,680 ÷ 400 = 4.2, above the three-times planning rule. The store may have room to test expansion and, for example, an acquisition ceiling of EGP 500, provided the lifetime estimate and payback profile remain sound. This can allow it to compete for customers that lower-margin competitors cannot afford.

How can you increase LTV?

There are three main routes:

• Increase average order value: Use suitable bundles, larger-size upgrades, a free-shipping threshold and relevant complementary products at checkout.
• Increase purchase frequency: Keep existing customers informed with relevant email or WhatsApp offers, repeat-purchase rewards and subscriptions for consumable products.
• Extend the relationship: Deliver quickly, supply what the description promises and provide customer service that responds and solves problems. The post-purchase experience gives people a reason to stay.

Common mistakes

• Using revenue instead of profit: It can multiply the apparent value by three times or more, depending on margins.
• Assuming all customers are alike: Heavy-discount customers may differ in loyalty and value from full-price customers. Break the calculation down by acquisition source to see what your own records show.
• Relying on an old average: Markets and customer behavior change. Review the estimate at least once or twice a year.
• Ignoring time: Profit expected three years from now is not equivalent to cash available today. Use conservative assumptions when comparing distant future value with immediate spending.

How can you start if you have never calculated it?

Take these steps this week:

1. Calculate average order value from the last three months: total revenue divided by orders.
2. Review repeat customers: How many bought more than once, and how often did customers buy on average? Many store platforms include repeat-purchase reports.
3. Use a realistic margin after product, delivery and payment costs and an allowance for returns, then apply the formula consistently.

Do not wait for a perfect estimate. An honest initial estimate is more useful than a precise calculation that never gets done. Record the assumptions and compare the result with acquisition cost.

One more useful question: which customers are most valuable today? Sort customers by total purchases and look at the first ten names. What do they have in common? Where did they come from? What helped them stay? Those answers can help you serve similar customers better and build more valuable relationships.

Summary

LTV helps turn marketing spending into an investment with a clearer economic basis. Estimate it from actual behavior and a profit-based margin, compare it with CAC and use the three-times rule as a planning guide, not a promise. Work on order value, repeat purchases and relationship length. Long-term success depends on more than attracting the cheapest first order.

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