What is LTV (Lifetime Value)?
The total revenue a business expects from a single customer account throughout their relationship. Also called CLV (Customer Lifetime Value).
Quick Definition
LTV (Lifetime Value): The total revenue a business expects from a single customer account throughout their relationship. Also called CLV (Customer Lifetime Value).
Understanding LTV (Lifetime Value)
Customer Lifetime Value (LTV or CLV) is the total revenue a business can expect from a single customer account throughout their entire relationship. It considers the customer's revenue contribution, minus the costs of serving them, over the duration they remain a customer. LTV is fundamental to understanding how much you can afford to spend on customer acquisition.
LTV helps companies make informed decisions about marketing spend, sales investment, and customer success resources. If you know a customer is worth $10,000 over their lifetime, you can rationally invest up to a portion of that amount to acquire them. Without understanding LTV, companies either overspend (acquiring customers at a loss) or underspend (missing growth opportunities).
For subscription businesses, LTV is particularly critical because revenue is spread over time. A customer paying $100/month who stays for 3 years is worth $3,600—but that value only materializes if you retain them. This makes customer retention and expansion key levers for improving LTV and overall business health.
Key Points About LTV (Lifetime Value)
LTV represents total expected revenue from a customer over their lifetime
Basic formula: LTV = Average Revenue Per User Ă— Customer Lifetime
The LTV:CAC ratio (aim for 3:1+) indicates business sustainability
Improving retention dramatically improves LTV
LTV should guide acquisition spending and customer success investment
How to Use LTV (Lifetime Value) in Your Business
Calculate LTV
For subscription businesses: LTV = ARPU Ă— Average Customer Lifetime (or ARPU / Churn Rate). For transactional businesses: Average Order Value Ă— Purchase Frequency Ă— Average Customer Lifespan. Choose the formula that matches your business model.
Segment LTV Analysis
Calculate LTV by customer segment, acquisition channel, plan type, and cohort. You'll likely find significant variations—enterprise customers may have 10x the LTV of SMB customers. Use these insights to prioritize acquisition and retention efforts.
Inform Acquisition Decisions
Use LTV to set CAC targets by channel and segment. If enterprise LTV is $50,000, you can justify $15,000 CAC. If SMB LTV is $2,000, CAC should be under $700. This prevents over-investing in low-value segments or under-investing in high-value ones.
Focus on LTV Improvement
Identify levers to increase LTV: reduce churn, increase expansion revenue, raise prices, or extend customer relationships. Often the highest-ROI growth investment is retention and expansion, not new customer acquisition.
Real-World Examples
SaaS LTV Calculation
A SaaS company has $200 ARPU and 3% monthly churn. Average customer lifetime = 1/0.03 = 33 months. LTV = $200 × 33 = $6,600. With $1,500 CAC, their LTV:CAC ratio is 4.4:1—healthy. Reducing churn to 2% would increase LTV to $10,000.
E-commerce LTV
An e-commerce brand sees $75 average order value, 4 purchases per year average, and 2.5 year average customer lifespan. LTV = $75 Ă— 4 Ă— 2.5 = $750. This guides their maximum CAC and informs loyalty program investments.
Segmented LTV Analysis
Analysis reveals: Enterprise customers ($100K+ ARR) have $400K LTV. Mid-market ($20-100K ARR) has $80K LTV. SMB (<$20K ARR) has $15K LTV. The company shifts resources toward enterprise acquisition where ROI is highest.
Best Practices
- Calculate LTV using multiple methods and timeframes for robustness
- Segment LTV by meaningful customer characteristics
- Include costs of serving customers for true profit-based LTV
- Update LTV calculations regularly as retention data matures
- Use LTV to guide, not dictate, acquisition and retention investments
- Consider LTV trends, not just point-in-time calculations
Common Mistakes to Avoid
- Using revenue without accounting for costs of service
- Calculating only overall LTV without segmentation
- Projecting LTV from immature cohort data
- Assuming LTV is static when it changes with product and market
- Over-optimizing for LTV:CAC at the expense of growth velocity
Frequently Asked Questions
How do I calculate LTV for a new business?
With limited data, use industry benchmarks and conservative assumptions. Calculate using the data you have (even 6 months), note the uncertainty, and update as more data becomes available. Early LTV estimates will be rough—that's okay as long as you're tracking toward refinement.
What's a good LTV:CAC ratio?
Generally, 3:1 or higher is considered healthy—each dollar spent on acquisition returns $3 in customer value. Below 3:1 suggests unsustainable unit economics. Above 5:1 might mean you're under-investing in growth. The ideal depends on your growth stage and capital situation.
How do I increase LTV?
Three main levers: reduce churn (extends customer lifetime), increase expansion revenue (upsells, cross-sells), and improve pricing. Reducing churn by just 5% can increase LTV by 25-95%. Often, retention improvements have higher ROI than acquisition investments.
Should I use gross or net revenue in LTV?
Use gross margin for a more accurate picture of true customer value. Revenue LTV is simpler to calculate but overstates value if your margins are thin. At minimum, understand both revenue LTV and contribution margin LTV.
How does LTV relate to retention?
LTV and retention are directly linked—LTV = Revenue × (1/Churn Rate). A 50% reduction in churn doubles LTV. This is why customer success investments often have higher ROI than acquisition investments. Retention is the most powerful LTV lever.
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