What is Customer Lifetime Value (LTV)?
Customer Lifetime Value (LTV) is the total gross profit a business expects to earn from a single customer across the entire relationship, before the cost of acquiring that customer.
Formula
LTV = Average revenue per account × Gross margin ÷ Churn rate
Example: A customer paying $200/month at an 80% gross margin, with 2% monthly churn, is worth roughly $8,000 in lifetime value.
LTV answers the question that makes acquisition spend rational: how much is a customer worth once you keep them? Without it, every marketing budget conversation is a guess, because there is no ceiling to compare acquisition cost against.
The most common error is calculating LTV on revenue rather than gross profit. A customer generating $10,000 in revenue at a 40% margin is worth $4,000, not $10,000—and the difference is usually the difference between a viable and an unviable acquisition channel.
The second most common error is using an over-optimistic churn assumption. LTV is extremely sensitive to churn: cutting monthly churn from 4% to 2% doubles lifetime value without changing a single thing about pricing or acquisition. For most SMBs, retention work moves LTV faster than any pricing change.
Segment LTV wherever you can. Blended LTV across self-serve and enterprise customers describes a customer who does not exist, and it will push budget toward the segment that looks profitable only on average.
What to do about it
- Use gross profit, not revenue, so the number reflects what you actually keep.
- Recalculate LTV by segment and by acquisition channel.
- Treat churn reduction as an LTV lever equal in weight to pricing.
Frequently asked questions
What is a good LTV?
LTV is only useful relative to acquisition cost. A healthy business typically generates at least three times more lifetime gross profit than it spends acquiring the customer.
How is LTV different from ARR?
ARR measures annualized recurring revenue across the current customer base. LTV projects the total gross profit from one customer over the full relationship, including expected retention.