Definition
Lifetime Value is a business metric used to estimate how much economic value a customer generates over the period they remain with a company.
The precise meaning of LTV varies by business model and calculation methodology. Some companies calculate LTV using revenue, while others use gross profit or contribution margin. For that reason, an LTV figure should always be interpreted together with the methodology used to calculate it.
LTV is particularly useful when evaluating customer acquisition economics. Comparing the value generated by customers with the cost of acquiring them can help a company determine whether its growth model is economically sustainable.
How is LTV calculated?
There is no single universal formula.
For a subscription business, a simplified revenue-based approach might be:
LTV = Average Revenue per Customer × Average Customer Lifetime
If a customer generates $100 per month and remains a customer for an average of 24 months:
$100 × 24 = $2,400 LTV
A gross-profit-based approach would incorporate gross margin:
LTV = Average Revenue per Customer × Gross Margin × Average Customer Lifetime
Using the same example with a 75% gross margin:
$100 × 75% × 24 = $1,800
The second figure estimates the gross profit generated rather than the revenue generated.
Why does the definition of LTV matter?
LTV can look substantially different depending on what a company includes.
For example, consider a customer who generates:
$2,400 in revenue
$1,800 in gross profit
$1,200 in contribution profit
The company could report different LTV figures depending on its methodology.
This is why an LTV number without a clearly stated definition can be difficult to interpret or compare.
What determines customer lifetime value?
Several factors can affect LTV.
Average revenue
Customers who spend more generally generate greater value, all else being equal.
Retention
Customers who remain longer can generate more cumulative value.
Gross margin
A company with a higher gross margin retains more economic value from each unit of revenue.
Expansion
Customers who increase their spending can have higher LTV.
Churn
Higher customer churn generally reduces the expected duration of customer relationships.
Pricing
Pricing changes can increase or decrease the value generated per customer.
LTV and churn
LTV is closely connected to customer retention.
If customers leave quickly, the expected lifetime of the relationship is shorter.
For a subscription business with a stable monthly churn rate, a simplified estimate of customer lifetime can sometimes be expressed as:
Average Customer Lifetime ≈ 1 ÷ Monthly Churn Rate
For example, at a constant monthly churn rate of 5%:
1 ÷ 0.05 = 20 months
This is a simplified statistical approximation and should not be treated as a precise forecast, particularly when churn varies across customer cohorts or over time.
LTV and CAC
One of the most commonly discussed applications of LTV is comparing it with Customer Acquisition Cost (CAC).
Suppose:
LTV: $3,000
CAC: $750
The company's LTV-to-CAC ratio is:
$3,000 ÷ $750 = 4:1
This means the estimated customer value is four times the acquisition cost under the chosen LTV methodology.
However, the ratio should not be interpreted without understanding whether LTV is based on revenue, gross profit, or another measure.
Is a high LTV always good?
Not necessarily.
A high estimated LTV can result from assumptions about long customer lifetimes, future expansion, or other factors that may not materialise.
LTV is an estimate based on historical or expected customer behaviour.
A company should therefore test its assumptions against actual customer cohorts and monitor whether realised customer economics are consistent with its LTV model.
LTV vs. revenue per customer
These measures are related but different.
Revenue per customer measures revenue generated by a customer over a defined period.
LTV estimates the value generated over the entire expected customer relationship.
For example:
Monthly revenue per customer: $200
Expected customer lifetime: 18 months
A simple revenue-based LTV would be:
$200 × 18 = $3,600
The customer may generate less economic value than $3,600 once direct costs are considered.
LTV and customer cohorts
Cohort analysis can make LTV estimates more useful.
Instead of applying one lifetime assumption to every customer, a company can analyse groups of customers acquired during different periods.
For example:
January cohort
February cohort
March cohort
The company can then compare their:
Retention
Revenue
Expansion
Churn
Gross profit
This can reveal whether customer quality is improving or deteriorating over time.
LTV in fundraising
Investors may examine LTV when evaluating businesses with recurring or repeat customers.
However, LTV is only one part of the analysis.
Investors may also consider:
CAC
Gross margin
Churn
Retention
Revenue growth
Payback period
Burn rate
Customer concentration
A company with attractive LTV but rapidly increasing CAC may still have weakening acquisition economics.
Example
A SaaS company charges customers an average of $150 per month.
Its average customer remains subscribed for 24 months, and its gross margin is 80%.
A simplified gross-profit-based LTV is:
$150 × 24 × 80% = $2,880
If its CAC is $720:
LTV ÷ CAC = $2,880 ÷ $720 = 4
The company has an estimated 4:1 LTV-to-CAC ratio under this methodology.
This does not by itself establish that the company's customer economics are sustainable. The calculation depends on the accuracy of its retention, revenue, and margin assumptions.
Common misconception
LTV is the amount a customer will definitely spend with a company.
No.
LTV is an estimate.
It depends on assumptions about customer behaviour, including retention, spending, expansion, pricing, and costs.
A reported LTV should therefore be accompanied by a clear methodology and, ideally, cohort evidence supporting the assumptions.
