When calculating lifetime value, businesses usually forget that part of their customers’ LTV is their referral of other customers. Missing this makes businesses underspend on marketing.

The golden ratio for an e-commerce business is customer acquisition cost (CAC) to lifetime value (LTV) ratio. Of course, the LTV of your customers matters a lot. And if your customers are more valuable, you can afford to spend more to acquire them.

How should you think about the LTV of the customers you acquire through paid marketing?

The primary value of a customer is the profit she generates herself from her paid orders. Nothing new here.

But the other way a customer generates value is by referring her friends and family to your business. You should think of the profit that her referred friends generate as part of the LTV of the paid customer.

At Hubble we’d closely track the average number of customers that a paid customer referred (plus the average LTV of those customers). Across businesses, I’ve seen this referral rate range from 0.1x to 0.5x–meaning the average paid customer referred 0.1 to 0.5 other customers.

That’s a lot, especially on the high end! But this isn’t an academic point. The expected profit of the referred unpaid customers should count when making decisions on how much to pay to acquire a paid customer.

For example, if your average paid customer is referring 0.25x other customers and those customers have the same expected profit as the first customer, you should think of the LTV of the paid customer as 1.25x their direct profit.

Incidentally, it doesn’t stop there–if the referred customers also themselves refer other customers, you should tack on the value of these 3rd-order customers too. Ad infinitum. If you’re feeling nerdy, whip out your old calculus textbook and have fun doing the integration. In the 0.25x referral example the average LTV of the paid customer is…1.33x their original value. If referral rate is 0.5x, the LTV of the paid customer doubles.

I usually write about how marketers have a tendency to forget to include all relevant costs or overinflate LTV. But don’t do the opposite! Referral potential can count for a lot when estimating a paid customer’s value.

Let me know what you think in the comments.