Most Brands Are Overestimating Their LTV – Here’s Why That’s a Problem

We were recently working with an established ecommerce brand that claimed their customer lifetime value (LTV) was £150. Based on that, they were happily acquiring customers at up to £50 CPA.

On the surface, fair enough.. But once we got into their data, it quickly became clear: the £150 figure wasn’t telling the full story!!

As we built out their data warehouse and started reviewing actual margins, we noticed something wasn’t adding up. On a per-order basis, the profit was thin. That £150 number started to look shaky.

So we broke it down into cohorts, analysed their retention, and two issues became immediately obvious.

Mistake 1: They used revenue, not profit

Here’s how they arrived at their LTV:

• Average order value (AOV) = £50
• Average of 3 purchases per customer
• So, £50 × 3 = £150
• That must be LTV, right?

Not quite. That’s average revenue, not lifetime value. LTV needs to account for profit – not just what the customer spends.

If gross margin is 35%, that £150 turns into £52.50. And if your CPA is £50, your profit is basically wiped out.

Mistake 2: They only looked at high-value users

They’d based their LTV on their best-performing customers – the ones who made multiple purchases and stuck around.

The problem? You don’t get to only acquire your best customers. You acquire everyone – including the one-timers and those who never return. If you don’t factor them in, your LTV will be overstated, and your CAC targets unrealistic.

So what’s the right way to calculate LTV?

Here’s a more grounded approach:

1. Group customers into cohorts

Use acquisition month or quarter to see how each group behaves over time.

2. Calculate CM3 on first purchase

This is your contribution margin after direct costs (COGS, shipping, processing).

3. Sum future CM2 from that cohort

Track all profit from future purchases by that group.

4. Divide by total customers in the cohort

This gives you the average LTV per user – including the ones who never buy again.

You can calculate this over different time horizons – 3, 6 or 12 months is common. We’ve seen some brands try 10-year models, but that’s usually more storytelling than strategy.

Why this matters

If you’re scaling paid acquisition based on inflated LTV, you’re likely burning budget chasing customers who’ll never pay back. We’ve seen this across brands of all sizes – and most aren’t even aware it’s happening.

LTV isn’t what a good customer is capable of spending. It’s the average profit a customer delivers – across everyone you acquire.

So before you scale your paid channels, make sure you’ve got the maths right.