LTV
Customer Lifetime Value
Quick definition
Customer lifetime value (LTV or CLV) estimates the total value a customer generates over their relationship with a business. How value and lifetime are measured varies by company.
Formula
LTV = Average Monthly Revenue per Customer × Expected Customer Lifetime (months)
Formula variables
- Average Monthly Revenue per Customer
- Revenue a typical customer generates each month.
- Expected Customer Lifetime (months)
- How long a typical customer is expected to remain a customer, estimated from your own retention data.
Worked example
- Average monthly revenue per customer
- $40
- Expected customer lifetime
- 18 months
40 × 18
Result: $720
A typical customer is expected to generate $720 of revenue over 18 months. This simple version assumes constant monthly revenue and a lifetime estimated from past data. The figures are illustrative.
How definitions differ
- Revenue-based or margin-based
- LTV = Monthly Revenue × Gross Margin % × Lifetime
- Revenue-based LTV counts revenue; margin-based LTV counts gross profit or contribution. With a 70% gross margin the example above becomes $504. Use the margin-based version when comparing LTV with acquisition cost.
- Churn-based shortcut
- LTV = Monthly Revenue × Gross Margin % ÷ Monthly Churn Rate
- A common approximation for subscriptions, where lifetime is estimated as 1 ÷ churn. It assumes churn is constant, which is often not true.
- Historical or predictive
- Historical LTV sums what customers have actually spent. Predictive LTV uses a model to estimate future value. They answer different questions and are not interchangeable.
- Period assumptions
- The time horizon matters. A value capped at 12 months is not comparable with an open-ended lifetime estimate.
How to interpret it
LTV puts a value on keeping customers, which is what makes it possible to judge how much it is worth spending to acquire them. Because it is an estimate, the assumptions matter more than the arithmetic.
Always state whether the figure is revenue or margin, historical or predicted, and over what period. Read it with CAC and retention.
When it is useful
- Deciding how much acquisition cost a customer can justify.
- Comparing the long-term value of customers from different channels or plans.
- Prioritising retention and loyalty work.
Limitations
- It is an estimate that rests on assumptions about lifetime and revenue.
- New products and recent cohorts have little data to base it on.
- Averages hide very different customer groups.
Common mistakes
- Comparing a revenue-based LTV with a margin-based CAC payback.
- Using one blended LTV for all segments.
- Presenting a predictive figure as if it were observed.