GlossaryGrowth & analytics
What is customer lifetime value (LTV)?
Also called: LTV, CLV, CLTV, lifetime value, LTV:CAC
Definition
Customer lifetime value (LTV) is an estimate of the total gross profit a business will earn from a typical customer over the whole time they stay a customer. It's compared with CAC to judge whether acquisition is worth it.
Customer lifetime value (LTV), explained
The common subscription shortcut is: average revenue per account per month, multiplied by gross margin, divided by monthly churn rate. If customers pay $50 a month, gross margin is 80%, and monthly churn is 4%, LTV is 50 × 0.8 ÷ 0.04 = $1,000. Dividing by churn works because a 4% monthly churn implies an average customer lifetime of about 25 months.
Use gross margin, not revenue. Revenue-based LTV overstates value, especially for products with real per-customer costs like AI inference, payments or support. The point is to compare what a customer contributes with what they cost to acquire.
Every LTV number rests on assumptions, and early-stage ones are fragile. Churn measured over a few months may not hold for years. A few big customers can skew the average. Expansion revenue can make real LTV higher than the formula suggests. Treat early LTV as a range and re-check it as data accumulates. Many operators cap assumed lifetime at a few years rather than trusting the formula's implied lifetime.
The LTV:CAC ratio compares lifetime value with acquisition cost. A ratio around 3:1 is a widely quoted rule of thumb for a healthy subscription business, meaning each customer returns roughly three times what it cost to win them. Treat that as a heuristic, not a law; payback time and cash flow matter as much as the ratio.
LTV varies a lot by segment and channel. Customers from high-intent search often stay longer than those from a discount promotion or lifetime deal. Calculating LTV per channel tells you which ones to grow.
Why it matters for founders
LTV sets how much you can afford to spend to win a customer. Without it, you can't tell whether a channel is an investment or a leak.
Example
A tool earns $40 a month per customer at 75% gross margin with 5% monthly churn: LTV ≈ 40 × 0.75 ÷ 0.05 = $600. With a blended CAC of $150, the LTV:CAC ratio is 4:1.
Common mistakes
- Calculating LTV from revenue instead of gross margin.
- Trusting a lifetime implied by a few months of churn data.
- Using one blended LTV for very different customer segments.
Related terms
- Customer acquisition cost (CAC)Customer acquisition cost (CAC) is the total sales and marketing spend in a period divided by the number of new customers won in that period. It tells you what it costs, on average, to get one paying customer.
- Churn rateChurn rate is the percentage of customers, or of recurring revenue, lost during a period. Monthly customer churn is customers who cancelled this month divided by customers you had at the start of the month.
- CAC payback periodCAC payback period is the number of months it takes for a new customer's gross profit to repay the cost of acquiring them. Shorter payback means cash comes back sooner to fund more growth.
- Monthly recurring revenue (MRR)Monthly recurring revenue (MRR) is the normalized amount of subscription revenue a business expects to receive every month from its active customers, excluding one-time fees and usage that isn't committed.
- RetentionRetention is the share of users or customers who keep using or paying for your product over time, usually measured for a cohort that started in the same period. It's the clearest signal that a product delivers lasting value.