LTV in Affiliate Marketing: Why It's Important and How to Calculate

What is LTV and Why Do You Need It?

LTV (Lifetime Value), or customer lifetime value, is a metric that shows how much profit one customer brings over their entire interaction with your products or services. In affiliate marketing, LTV is particularly relevant as it helps measure the effectiveness of offers and advertising campaigns.

Understanding LTV allows you to:

1. Set clear ROI goals. Even if cohort analysis shows negative ROI in the initial stages, high LTV can compensate for these costs in the future. For example, during the customer acquisition stage, your expenses may exceed income, but thanks to repeat purchases or subscriptions, the funnel becomes profitable after 2-3 months. This is important to consider to avoid prematurely closing promising campaigns.
2. Evaluate scalability. If an offer generates high LTV, it makes sense to increase traffic volumes.
3. Develop long-term strategies. Instead of one-time sales, you focus on customer retention and increasing their value.

Why is LTV Especially Important in Affiliate Marketing?

For marketers working with offers, understanding LTV helps choose not only profitable offers but also determine the strategy for working with them. For example:

• If you're running traffic to subscription services, knowing LTV helps understand how many months a customer will pay for the subscription.

• In e-commerce (online stores), LTV shows how often customers return for repeat purchases.

Most importantly — without understanding LTV, you can go negative by underestimating acquisition costs or overestimating customer revenue.

How to Calculate LTV?

Simple Calculation

At a basic level, the LTV formula looks like this: 

LTV = Average Order Value × Number of Purchases per Customer

For example:

• Average order: $25
• Customer makes 4 purchases
• LTV = $25 × 4 = $100

This method works for simple offers, but it doesn't take into account important factors like:

• Customer churn. Not all customers stay with you long-term.
• Margin. If your margin is small, it's important to consider only profit, not total revenue.

Margin Consideration

For more accurate calculation, use this formula considering margin: 

LTV = (Average Order Value × Number of Purchases × Margin) ÷ Number of Customers

For example:

• Average order: $50
• Customer buys 3 times
• Margin: 40%
• LTV = ($50 × 3 × 0.4) = $60

Complex Models: Cohort Analysis

Cohort analysis allows you to divide customers into groups (cohorts) based on certain characteristics, such as acquisition time. Then you analyze their behavior over time.

This approach provides accurate LTV data for each customer group, which is especially useful in affiliate marketing. For example, you might see that customers acquired in winter bring more money than those acquired in summer.

What Data Do You Need for Calculation?

To calculate LTV, you need:

1. Average order value. How much a customer spends per purchase.
2. Number of purchases. How many times a customer makes repeat orders.
3. Customer lifecycle duration. How long a customer remains active.
4. Margin. Your net income after all expenses.

This data can be collected from CRM, analytics services (Google Analytics, AppsFlyer) or trackers like Binom or Voluum.

LTV in Different Niches

E-commerce

In online stores, LTV depends on average order value and purchase frequency. For example, electronics customers return less frequently than clothing buyers, but their average order value is usually higher.

Subscription Services

If you work with subscriptions (streaming services, apps), it's important to consider the average subscription duration. For example, a $10 monthly subscription with 6 months LTV will bring you $60.

Nutrition

Offers in nutra (supplements, cosmetics) are often oriented toward repeat orders. If a customer is satisfied with the product, they're likely to buy it again, increasing LTV.

How to Improve LTV?

1. Customer Retention

Retention is key to high LTV. If you work in e-commerce, offer customers discounts on repeat purchases. In subscription services, you can introduce bonuses for loyal customers.

2. Cross-sell and Upsell

Cross-sell and upsell are not just ways to increase average order value but also opportunities to extend customer interaction over time. For example, if you sold a customer a basic course, offer a premium version or additional materials after a month or two. This approach helps retain customers, return them to the funnel, and increase overall value (LTV).

It's important to understand that upselling shouldn't happen instantly. Gradual progression through the product chain increases chances for long-term relationships.

3. Product Improvement

Product improvement helps not only retain current customers but also attract more solvent audiences, increasing their loyalty and value. For example, adding new features or improving product quality can increase the likelihood that customers will recommend the product to friends, which increases LTV through organic growth.

Instead of focusing only on retention, it's important to emphasize that a quality product itself creates a sustainable base for your business growth.

4. Segmentation and Personalization

Use customer data to create personalized offers. For example, if a customer frequently buys a certain product, offer them something from the same category.

How to Avoid LTV Mistakes?

There are several mistakes to avoid:

Ignoring Churn

If customers leave, it affects the final LTV metric. High churn rate can significantly reduce LTV, especially in subscription and service models. This means you need to not only attract new customers but also work on retaining current ones to avoid losing them after a short period. For example, if 30% of customers drop off each month, LTV will be significantly lower than with a low churn rate, even if your initial conversions are high.

Controlling churn rate means controlling LTV, because the fewer customers leave, the more time they spend with you, increasing their value.

Ignoring Total Expenses

To make LTV as objective as possible, it's important to consider not only customer acquisition costs but all operational expenses, including support and retention. This will give you a more accurate picture of real profit from each customer.

Too Short Analysis Period

If you evaluate LTV over too short a period, the data can be distorted.

Why LTV Is Your Main Tool in Affiliate Marketing?

LTV is not just a number, it's a way to understand which offers work better, how to optimize advertising campaigns, and where the real money is hidden.

If you're not calculating LTV yet, now is the time to start. It will help take your campaigns to a new level, making them more profitable and stable. 🚀

And remember: the world of marketing loves those who know how to count.