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LTV: customer lifetime value, formula and example

LTV (Lifetime Value) is the total revenue or profit from a customer over the entire period of the relationship. The metric combines monetization, margin, and retention and serves as a benchmark for investments in acquisition (CAC), loyalty, and service.

What the Metric Measures

The long-term economics of the customer relationship: whether acquisition and retention costs pay off, which segments are most valuable, and where to scale investments. It works for both subscription and transactional models.

Calculation: Main Approaches

  • Cohort-based (cumulative): LTV(t) = Σ (Revenue × Gross margin, %) − returns/fees; discounting if needed
  • Subscriptions (steady-state): LTV ≈ (ARPA × Gross margin, %) / Churn or ARPA × Margin × Average customer lifetime
  • Transactions: LTV = (AOV × Gross margin, %) × Frequency × Lifetime horizon
  • Benchmarks: LTV/CAC and Payback (months)

Use net revenue, account for returns, coupons, and fees; define the currency and period.

Calculation example

The average order is 800, a customer buys 6 times a year and stays 3 years on average, and gross margin is 35%. Revenue LTV = 800 × 6 × 3 = 14,400, gross-profit LTV = 14,400 × 0.35 = 5,040. This is the amount compared with the cost of acquiring a customer.

Data Sources

ERP/1C, CRM/billing, subscription data (MRR/Churn), event analytics, marketplaces, payment providers; consistent reference lists of customers, channels, and SKUs.

Interpretation

  • LTV growth = better retention, higher ARPU/AOV, a stronger mix and margin
  • Low LTV with high CAC — risk of not paying off
  • Evaluate together with GRR/NRR, LTV/CAC, and Payback

Useful Breakdowns

  • Acquisition channels and first-purchase/activation cohorts
  • Loyalty segments, categories/SKUs/plans
  • Regions, B2C/B2B, new vs. returning
  • Campaign and promotion types

Dashboard Visualizations

  • Cohort heatmaps of LTV(t) and retention curves
  • NRR/GRR over time
  • A chart of LTV/CAC and Payback
  • LTV decomposition: frequency × AOV × margin
  • A map of LTV by channel and segment

How to Set Targets

Aim for LTV/CAC ≥ 3:1 and Payback ≤ 6–12 months; set NRR/GRR thresholds and a minimum gross margin. Maintain a rolling forecast of LTV with updates to retention, prices, and mix.

Common Mistakes

  • Calculating from revenue instead of gross margin
  • Ignoring returns/fees and inconsistent currencies
  • Applying the steady-state formula when churn is unstable
  • No discounting for long horizons
  • Double-counting reactivations and a vague definition of an "active" customer

Questions for Discussion

  • Which channels have the highest LTV, and what drives it — retention or monetization?
  • What are the Payback and LTV/CAC by channel/segment?
  • Which product changes will raise LTV within 1–2 quarters?

Questions and answers

What is LTV?

Lifetime Value — the total revenue or gross profit a company earns from one customer over the whole relationship.

How do you calculate LTV?

LTV = average order value × purchases per year × average relationship length in years × gross margin. For subscriptions: ARPU × margin / monthly churn.

Why compare LTV with CAC?

To see whether acquisition spend pays back: if LTV is lower than the cost of acquiring a customer, every new customer brings a loss.