Lifetime Value (LTV)
The total gross profit a customer is expected to generate before they leave — the ceiling on what acquiring them can be worth.
Growth & MetricsLTV estimates what a customer is worth over the whole relationship. The workable formula is ARPU × gross margin ÷ churn rate, which gives the profit, not the revenue, a customer produces across their expected lifetime. Using revenue instead of gross profit is the most common error and inflates the figure by whatever your cost of service is — substantial for anything with real infrastructure or support.
Every LTV is a forecast built on a churn assumption, which makes it fragile in exactly the situation where people quote it most: early-stage companies with a few months of data. A young product cannot know its churn rate, so its LTV is a projection of a projection. Segmenting helps — enterprise and self-serve customers have different churn and different margins, and averaging them produces a number that describes no actual customer.
In practice
A subscription product quoted LTV of €2,400 using revenue and a 2% monthly churn figure from its best cohort. Recomputed with gross margin (68%) and blended churn (4.1%), it came to €790 against a CAC of €610. The company had been hiring sales staff against the first number.
Where teams get it wrong
- Using revenue rather than gross profit.
- Applying the churn rate of the best cohort to the whole base.
- Quoting LTV before there is enough history to know churn.
- One blended LTV across segments with different margins and retention.
- Not discounting revenue years out, which overvalues long-lived customers.
Learn more
You may ask
Frequently Asked Questions
How do you calculate LTV?
ARPU × gross margin ÷ churn rate, for a matching period. Using revenue in place of gross margin inflates the result by the entire cost of serving the customer.
What is the difference between LTV and CLV?
Nothing — they are the same metric under different names. LTV is more common in SaaS, CLV in ecommerce and retail.
Related terms
All terms- Customer Acquisition Cost (CAC)The fully loaded cost of winning one new customer — all sales and marketing spend divided by the customers it produced.
- LTV:CAC RatioWhat a customer is worth against what they cost to acquire — the headline test of whether growth creates value.
- ARPUAverage revenue per user or account over a period — the numerator in most unit-economics calculations, and the one most often averaged badly.
- ChurnThe rate at which customers stop paying or stop using a product over a given period — the mirror image of retention.
Defined by Mara Last reviewed .
Let's talk about your product.
Happy to look at what you're building and say where design would move the needle.
Contact Us