Definition
Customer lifetime value (LTV, also written CLV or CLTV) is the total gross profit you expect to earn from a customer over the whole time they stay. It tells you how much you can afford to spend acquiring one.
Formula (subscription businesses)
LTV = (ARPA × gross margin) ÷ monthly churn rate
where ARPA is average monthly revenue per customer. Dividing by churn gives the average lifetime: at 2% monthly churn, a customer stays about 50 months on average.
Example
Customers pay $60 a month, gross margin is 85%, monthly churn is 4%.
- Monthly gross profit per customer: $60 × 0.85 = $51
- Average lifetime: 1 ÷ 0.04 = 25 months
- LTV: $51 × 25 = $1,275
How it's used
LTV is compared with CAC, the cost to acquire a customer. A common rule of thumb is that LTV should be at least three times CAC. See LTV to CAC explained.
Common mistakes
- Using revenue instead of gross profit, which overstates LTV.
- Trusting it too early. With a few months of data churn is noisy, and LTV swings a lot. Treat it as a range.
- Assuming lifetimes are infinite. If churn looks near zero because you're young, LTV looks enormous. Cap the lifetime you assume, for example at three to five years.