Definition
Customer Lifetime Value (LTV) = the total net revenue (or profit) a business expects to earn from a single customer over the entire relationship.
It answers:
“How much is a customer worth to us, on average, before they churn?”
Basic Formula
$\text{LTV} = \text{ARPU} \times \text{Gross Margin} \times \text{Customer Lifetime}$
Where:
- ARPU = Average Revenue Per User (monthly or annually).
- Gross Margin = % of revenue kept after cost of goods sold.
- Customer Lifetime = average duration (in months/years) the customer stays.
Example
Suppose:
- Average monthly revenue per customer = $50
- Gross margin = 80%
- Average customer lifetime = 24 months
$\text{LTV} = 50 \times 0.8 \times 24 = \$960$0
Each customer is worth about $960 over their lifetime.
Variants of LTV
- Simple (Cohort-based)
- Use averages of ARPU and churn.
- Predictive LTV (pLTV)
- Use machine learning to estimate each customer’s expected revenue based on behavior (clicks, purchases, retention signals).
- Gross LTV vs Net LTV
- Gross LTV: before subtracting acquisition costs.
- Net LTV: after subtracting CAC.
Relationship to CAC
- The LTV:CAC ratio is one of the most important growth metrics.
- Healthy benchmark: ≥ 3:1
- If 1:1 → you break even (unsustainable).
- If too high (e.g., 10:1) → you may be underinvesting in growth.
Why LTV Matters
- Budgeting & forecasting → how much you can afford to spend on acquisition.
- Valuation metric for investors (esp. in SaaS, D2C, subscriptions).
- Customer segmentation → identify high-LTV vs low-LTV cohorts.
- Retention focus → increasing retention often increases LTV more efficiently than reducing CAC.
Improving LTV
- Increase retention (reduce churn).
- Upselling / cross-selling.
- Raise ARPU via pricing optimization.
- Improve onboarding → longer average lifetime.
Summary
- LTV = total net value per customer across their lifecycle.
- Must be analyzed alongside CAC.
- Healthy businesses optimize LTV:CAC ratio to guide sustainable growth.