Customer Lifetime Value (LTV)
Customer Lifetime Value (LTV) is the total revenue you expect to earn from a single customer over the entire time they stay with you.
What it means
LTV tells you how much each customer is worth across their full relationship with you. If your average customer pays $30/month and stays 8 months, your LTV is $240. That number determines how much you can profitably spend to acquire each new customer.
The simplest LTV formula multiplies your average revenue per customer per month by the average customer lifespan in months. More accurate calculations use cohort retention curves, but the simple version is fine for most early-stage products.
LTV is the foundation of unit economics. Your CAC must be less than LTV (ideally a third of it). If LTV is $300 and CAC is $400, you're losing money on every customer. If LTV is $300 and CAC is $50, you have a healthy growth engine.
Why it matters
Without knowing LTV, you can't tell if your acquisition spend is profitable. Most early-stage founders underestimate LTV (forgetting upsells and renewals) and overestimate CAC. Knowing both lets you scale acquisition with confidence.
How to calculate customer lifetime value (ltv)
LTV = ARPU / Churn Rate (or ARPU × Avg Customer Lifespan)
Multiply average revenue per customer per month by average customer lifespan in months. Or use ARPU divided by churn rate.
Example with real numbers
Concrete example showing how this metric works in practice.
Scenario
Your average customer pays $25 per month. Your monthly churn rate is 5%, meaning the average customer stays 20 months.
Calculation
$25 / 0.05 = $500 (or $25 × 20 months = $500)
What it means
Your LTV is $500. If your CAC is $100, your LTV:CAC ratio is 5x. That's a healthy unit economic profile and means you can spend more on acquisition profitably.
What's a good number?
Typical benchmarks. Always compare against your own historical data first, industry averages second.
LTV:CAC below 1x (losing money per customer)
LTV:CAC 1x to 3x
LTV:CAC 3x to 5x
LTV:CAC above 5x
Absolute LTV varies massively by business. The benchmark that matters is LTV:CAC ratio. The 3x rule is a starting point: LTV should be at least 3 times CAC for a healthy business.
Common mistakes
Things people get wrong when measuring customer lifetime value (ltv).
Mistake 01
Forgetting to subtract gross margin. LTV in revenue terms vs LTV in profit terms can differ significantly.
Mistake 02
Using gross revenue when calculating LTV for a service-heavy business. Net revenue is more honest.
Mistake 03
Calculating LTV from a tiny sample. Small numbers are unreliable; you need at least a few months of cohort data.
Mistake 04
Forgetting upsells and renewals. LTV should include all revenue from a customer, not just first purchase.
How to track it
Start with the simple formula (ARPU / monthly churn rate). Once you have 6+ months of cohort data, switch to a more accurate calculation that uses actual retention curves. Track LTV by acquisition channel to see which channels deliver the best customers.
Related concepts
Other terms worth learning if you're studying this one.
Common questions about customer lifetime value (ltv)
Customer lifetime value (LTV) is the total revenue you expect from one customer over their entire relationship with you. It's used to evaluate whether your acquisition spend is profitable.
The simple formula is ARPU divided by churn rate. If your average customer pays $25/month and your monthly churn is 5%, your LTV is $500. More accurate methods use actual cohort retention curves.
It depends on your CAC. The healthy benchmark is LTV at least 3 times your CAC. Absolute numbers vary so much by industry that the ratio is more useful than the raw LTV.
Reduce churn (customers stay longer), increase ARPU (upsells, plan upgrades), or both. Reducing churn usually has the bigger compounding effect because retained customers also refer others.