Resources / Glossary / Lifetime value

Lifetime value.

Aka. Customer lifetime value · LTV · CLV · CLTV
All terms

What is lifetime value?

Lifetime value, usually abbreviated LTV (or CLV/CLTV), is the total profit a company expects to earn from a customer across the entire relationship — not just the first sale. It is the number that tells a business how much it can rationally spend to acquire and keep a customer, because it sets the ceiling on what that customer is worth.

The key word is profit, not revenue. A properly built LTV uses the gross margin a customer generates, not their gross spend, because the cost of serving them is real. A customer who pays a lot but is expensive to serve is worth less than the headline revenue suggests.

LTV is fundamentally a function of three things: how much margin a customer generates per period, how long they stay (the inverse of churn), and — in more rigorous versions — the time value of money applied to future periods. Improve any of those and LTV rises. This is why retention work, which lengthens the relationship, is one of the most powerful ways to increase LTV without selling anything new.

How lifetime value is calculated

LTV can be estimated simply or modeled rigorously; the inputs are the same, the discipline differs.

  1. Per-period margin. Take the average revenue a customer generates per period and multiply by gross margin to get the profit they contribute each period.
  2. Expected lifetime. Estimate how long the customer stays. For a recurring business, this is roughly one divided by the periodic churn rate — a 5% monthly churn implies an average life of about twenty months.
  3. Multiply. Periodic margin multiplied by expected lifetime gives an undiscounted LTV.
  4. Discount (the rigorous version). Because most of the margin arrives in future periods, discount those cash flows back to present value so the figure reflects that a dollar next year is worth less than a dollar today.

The most common mistake is using revenue instead of margin, which overstates LTV — sometimes dramatically — and makes acquisition spend look far safer than it is.

LTV against CAC: the ratio that matters

LTV is rarely used alone. Its purpose is to be compared with the cost of acquiring a customer (CAC). The LTV-to-CAC ratio answers a simple question: for every dollar spent winning a customer, how many dollars of lifetime profit come back?

A ratio below one means the business loses money on every customer it acquires — a structural problem no amount of growth fixes. A healthy ratio is comfortably above one, with enough margin to cover the overhead the unit-economics view ignores. But the ratio alone is not enough; CAC payback — how quickly the acquisition cost is recovered — matters just as much, because a great LTV/CAC ratio that takes years to pay back still consumes cash the whole time.

Frequently asked.

5 questions
01 Should LTV use revenue or gross profit?

Gross profit. The point of LTV is the value a customer creates, and serving a customer has real cost. Using revenue ignores the cost of goods and service and overstates LTV, often by a wide margin.

A customer who pays a lot but is expensive to support is worth far less than their revenue implies, and a margin-based LTV is the only version that supports a sound decision about acquisition spend.

02 How is LTV related to churn?

Directly and powerfully. Expected customer lifetime is roughly the inverse of the churn rate, so lower churn means a longer relationship and a higher LTV — with no change to pricing or product.

This is why retention improvements compound: cutting churn lengthens every customer's life, lifting LTV across the entire base at once.

03 What is a good LTV-to-CAC ratio?

The ratio must comfortably exceed one — meaning each acquired customer returns more lifetime profit than they cost to win — with enough headroom to cover overhead the unit-economics view excludes. Many operators look for a multiple of acquisition cost rather than a thin margin over it.

But the ratio is only half the picture. A strong ratio that takes years to pay back still ties up cash, so CAC payback period should always be read alongside it.

04 Why discount future cash flows in an LTV?

Because most of a customer's margin arrives in future periods, and a dollar received years from now is worth less than a dollar today. Discounting converts the stream of future margin into present value.

For a quick internal estimate, an undiscounted LTV is often used. For investment decisions and longer relationships, discounting materially changes the figure and is worth doing.

05 How is LTV tracked over a holding period?

LTV is typically modeled by cohort — grouping customers by when they were acquired — and tracked alongside CAC, churn, and payback in the KPI dashboard, so the unit economics are visible rather than assumed.

When the underlying cohort, margin, and retention data live in one queryable place, LTV can be recomputed as assumptions change instead of being a static slide that quietly goes stale between board meetings.

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