Customer lifetime value (LTV)
Also known as: LTV, CLV, CLTV, lifetime value, customer lifetime value
Customer lifetime value (LTV or CLV) is the gross margin a business expects to earn from one customer over the whole time that customer keeps buying.
LTV = average monthly revenue per customer × gross margin % / monthly churn rateLTV answers how much a customer is worth to the business before they leave. It caps what you can sensibly pay to acquire one. We count it in margin, not revenue. Take a customer with lifetime revenue of $10,000. At a 20% margin that customer is worth $2,000, and that is the figure to compare with acquisition cost. For the margin itself, see contribution margin.
Example
A fintech subscription earns $80 per customer per month at a 70% gross margin. Monthly churn is 4%, so the average customer stays about 1 / 0.04 = 25 months.
LTV = $80 × 0.70 / 0.04 = $1,400.
If churn falls to 3%, LTV rises to about $1,867, with no change in price. The figures are illustrative.
How to use it
The simple formula assumes constant revenue and constant churn. Real customers rarely behave that way: churn is usually highest in the first months, and survivors often expand. A cohort calculation is more accurate. Take customers who started in the same month, add up the actual margin each cohort produced month by month and extend the curve only where you have data.
Use LTV to set the ceiling on acquisition spend, to compare channels and to decide where retention work pays off. Read it next to LTV to CAC ratio and the payback period, because LTV earned over five years does not help cash flow this quarter.
Common mistakes
- Using revenue instead of margin, which inflates LTV several times in low-margin businesses.
- Plugging in a churn rate from a young cohort and getting a lifetime of decades.
- Averaging all customers together when channels bring very different retention.
- Treating LTV as cash already earned rather than an estimate with a long time horizon.