LTV (Lifetime Value)
The total gross profit a business expects from a single customer over the entire duration of their relationship.
LTV (Lifetime Value, sometimes CLV for Customer Lifetime Value) measures how much profit a single customer is worth over their entire relationship with the business. It's the upper-bound number on what you can spend to acquire that customer (CAC) while remaining profitable.
The calculation
For a subscription business: LTV ≈ ARPU × gross margin × average customer lifetime
Where:
- ARPU — average revenue per user per period (typically per month)
- gross margin — revenue minus cost-of-goods (hosting, support, payment processing), as %
- average customer lifetime —
1 / churn rate
For a 5% monthly churn rate, the average lifetime is 20 months. If ARPU is $50 and gross margin is 80%, LTV ≈ $50 × 0.80 × 20 = $800.
Why the formula is approximate
1/churn overstates lifetime because it assumes churn is constant. In reality, customers who survive the first 3 months churn much more slowly than new ones. More sophisticated LTV calculations use cohort-based retention curves rather than a single churn rate.
For early-stage companies with < 12 months of data, any LTV calculation is largely guess. Use it directionally; don't over-interpret the precision.
What LTV is useful for
- Setting CAC ceilings: LTV / CAC ≥ 3× is the standard healthy ratio
- Comparing customer segments: enterprise LTV might be 10× SMB LTV — informs which segment to invest acquisition spend in
- Pricing decisions: a price increase that doesn't change churn rate increases LTV proportionally
What LTV is bad for
- Forecasting absolute future revenue — too many assumptions stack on top of each other
- Justifying high CAC in early-stage companies — when churn data isn't reliable, the LTV number is fiction
- Comparing across businesses with different lifetimes — a 10-year B2B contract LTV isn't comparable to a 12-month consumer subscription LTV