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?”

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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.

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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.

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Variants of LTV

1. Simple (Cohort-based)
   • Use averages of ARPU and churn.
2. Predictive LTV (pLTV)
   • Use machine learning to estimate each customer’s expected revenue based on behavior (clicks, purchases, retention signals).
3. Gross LTV vs Net LTV
   • Gross LTV: before subtracting acquisition costs.
   • Net LTV: after subtracting CAC.

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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.

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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.

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Improving LTV

• Increase retention (reduce churn).
• Upselling / cross-selling.
• Raise ARPU via pricing optimization.
• Improve onboarding → longer average lifetime.

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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.