1. Definition

  • Net LTV (sometimes called Contribution LTV) = the profit contribution from a customer over their lifetime, after subtracting the direct costs of serving them.
  • Unlike Gross LTV (which is just total revenue), Net LTV adjusts for gross margin.

It answers: “How much profit do we really keep from a customer over their lifetime?”

2. Formula

$\text{Net LTV} = \text{Gross LTV} \times \text{Gross Margin \%}$

Or expanded:

$\text{Net LTV} = (\text{ARPU} \times \text{Customer Lifetime}) \times \text{Gross Margin \%}$

Where:

  • ARPU = Average Revenue per User (monthly or yearly)
  • Customer Lifetime = average retention time (e.g., $1/\text{churn}$)
  • Gross Margin % = (Revenue – COGS) ÷ Revenue

3. Example

  • ARPU = $50/month
  • Monthly churn = 5% → Customer Lifetime = $1 / 0.05 = 20$ months
  • Gross Margin = 70%

Step 1: Gross LTV

$\text{Gross LTV} = 50 \times 20 = \$1,000$

Step 2: Net LTV

$\text{Net LTV} = 1,000 \times 0.7 = \$700$

So although the customer pays $1,000 total revenue, the company really keeps $700 in profit contribution after direct costs.

4. Why It’s Important

  • Provides a realistic measure of customer value.
  • Key for unit economics: compare Net LTV vs CAC.
  • Investors & CFOs care about Net LTV more than Gross LTV, because it reflects sustainable profit.

5. Net LTV vs Gross LTV vs Blended CAC

  • Gross LTV → revenue only (optimistic).
  • Net LTV → revenue × margin = profit contribution (realistic).
  • CAC → cost to acquire the customer.

Healthy business rule of thumb:

$\frac{\text{Net LTV}}{\text{CAC}} \geq 3$

(i.e., you make at least 3× profit compared to what you spend to acquire).

Summary:
Net LTV = Gross LTV × Gross Margin.
It shows how much profit you actually keep per customer over their lifetime, and is the true metric to compare against CAC.