Definition (canonical)
Customer Lifetime Value (LTV) is the total profit a customer generates over the entire relationship. It answers the question every acquisition budget depends on: how much is a customer worth — and therefore how much can you afford to pay to win one?
The working formula
Full modeling can get elaborate; the workhorse version is: `LTV = ARPU × gross margin × average lifetime`, where lifetime ≈ `1 ÷ churn`. Example: 100/month subscription, 80% margin, 2.5% monthly churn → lifetime 40 months → LTV = 100 × 0.8 × 40 = 3,200. Two disciplines make the number honest: use MARGIN, not revenue (a customer's value is what they leave, not what they pay through you), and use cohort-measured churn, not an optimistic blend.
LTV:CAC — the ratio that runs growth budgets
Alone, LTV is trivia; divided by customer acquisition cost it becomes a steering wheel. Convention: LTV:CAC around 3:1 is healthy; far below means you overpay for growth (or retain too weakly); far above (6+:1) usually means underinvestment in acquisition — you could grow faster. The pair also drives channel decisions: a channel with double the CAC may still win if it brings customers with triple the LTV — which is why segmenting LTV by channel, plan and cohort beats one blended number every time.
How LTV gets inflated (and caught)
Classic sins auditors and investors look for: computing on revenue instead of margin; using early-cohort churn from the founder's-friends era; assuming infinite lifetimes from a few loyal accounts (cap projections at a sane horizon, e.g. 3–5 years discounted); ignoring expansion churn asymmetry. A degraded but robust alternative when data is thin: measure realized value per cohort at 12 and 24 months — less flattering, far more trustworthy, and it converges to true LTV as cohorts age.
FAQ
Payback period vs LTV:CAC? Complementary: LTV:CAC measures profitability of a customer, payback measures how fast the cash returns — growth dies of cash, not ratios, so track both.
Does LTV apply outside subscriptions? Yes: e-commerce computes it from repeat purchase rate and average order margin — the formula changes, the logic doesn't.
How often should LTV refresh? Quarterly, per cohort — a single stale spreadsheet number quietly misprices a year of marketing.
Related: CAC · Churn · Unit Economics · Margin Reviewed: 2026-07-15 · Sources: unit economics canon