LTV (Lifetime Value)
Quick Answer: Lifetime Value (LTV) is the profit or revenue expected from a customer over their relationship; compare to CAC for payback and ROI of acquisition.
Lifetime Value (LTV) is the total revenue or profit a company expects to earn from a customer over the entire relationship. It is used to justify acquisition spend, set budgets, and evaluate marketing and product investments. LTV is typically paired with CAC to assess unit economics.
This page provides a structured explanation of Lifetime Value (LTV) and its use with CAC and ROI, including formulas, examples, limitations, and comparisons with related financial metrics.
When to Use This Calculation
- Sizing acquisition budgets
- Computing LTV:CAC and marketing ROI
- Segmenting high-value cohorts
Limitations of This Metric
- LTV models rely on churn and margin assumptions
- Revenue-based LTV overstates profit if margin is low
- Historical cohorts may not predict future behavior
What Is LTV (Lifetime Value)?
Lifetime Value (LTV) is the total value attributed to a customer over the relationship, often expressed as profit or revenue depending on company practice.
Formula
For subscription or recurring revenue businesses, a common form is:
LTV = (ARPU × Gross Margin) / Churn Rate
Where ARPU is average revenue per user, Gross Margin is the margin on that revenue (see gross margin), and Churn Rate is the monthly or annual rate at which customers leave (see churn rate). For transaction-based businesses, LTV may be estimated as average order value × number of purchases per year × average customer lifespan.
Example
A subscription service has $50/month ARPU, 70% gross margin, and 5% monthly churn. LTV ≈ ($50 × 0.70) / 0.05 = $700. If CAC is $200, the LTV:CAC ratio is 3.5:1.
Relationship to CAC and ROI
LTV must exceed CAC for the business to be profitable on a per-customer basis. The LTV:CAC ratio indicates how many dollars of lifetime value are generated per dollar of acquisition cost. Marketing ROI can be framed as (LTV − CAC) / CAC. Higher LTV improves ROI and allows higher CAC while remaining profitable.
Caveats
LTV is a projection. It depends on churn, retention, and revenue assumptions that may change. Early-stage companies often have limited data and must rely on benchmarks or proxies. Discounting future revenue to present value is sometimes applied for more precise LTV, though simplified formulas are common in practice.