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Financial Metricsessential

Customer Lifetime Value (LTV/CLV)

The total revenue a business can expect from a single customer account throughout their relationship.

Formula
LTV = ARPU × Gross Margin ÷ Monthly Churn Rate
Example

If customers pay $50/month with 80% gross margin and 5% monthly churn, LTV = $50 × 0.80 ÷ 0.05 = $800

Good Range

LTV should be at least 3x CAC for healthy businesses

Warning Range

LTV < CAC means you lose money on every customer

Complete Definition

Customer Lifetime Value (LTV), also known as CLV or CLTV, represents the total revenue you can expect from a single customer over the entire duration of their relationship with your business. It's a forward-looking metric that helps you understand how much you can afford to spend on acquisition while remaining profitable.

LTV is particularly important for subscription-based businesses, SaaS companies, and any business with recurring revenue. It helps answer the fundamental question: "Is this customer worth acquiring?"

How to Calculate LTV

There are several methods to calculate LTV, from simple to complex:

Simple Formula

LTV = Average Revenue Per User (ARPU) × Average Customer Lifespan

More Detailed Formula

LTV = (Average Purchase Value × Purchase Frequency × Customer Lifespan) × Gross Margin

For Subscription Businesses

LTV = ARPU × Gross Margin ÷ Churn Rate

Why LTV Matters

- Determines maximum sustainable CAC - Helps prioritize customer segments - Informs pricing decisions - Guides retention investments - Essential for financial forecasting

Improving LTV

- Increase average order value through upsells - Improve retention to extend customer lifespan - Expand product offerings - Enhance customer experience

Used in:Financial ProjectionsUnit Economics Analysis

Related Terms

Customer Acquisition Cost (CAC)
The total cost of acquiring a new customer, including marketing and sales expenses.
LTV:CAC Ratio
The ratio between customer lifetime value and customer acquisition cost, measuring unit economics health.
Churn Rate
The percentage of customers or revenue lost during a specific time period.
Average Revenue Per User (ARPU)
The average revenue generated per user or account over a specific period.
Monthly Recurring Revenue (MRR)
The predictable, recurring revenue generated each month from subscription customers.

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