Lifetime Value (LTV)

What is Lifetime Value (LTV)?

LTV (also written as CLV — Customer Lifetime Value) estimates the total revenue one customer will generate before they churn. It combines average revenue per customer with average customer lifespan.

The simplest LTV calculation: average monthly revenue per customer divided by monthly churn rate. If a customer pays $100/month and your monthly churn is 5%, LTV = $100 / 0.05 = $2,000.

More sophisticated LTV models account for expansion revenue (customers upgrading over time), variable costs, and discount rates. But for most startups, the simple formula provides a useful enough estimate for decision-making.

Why it matters

LTV is half of the most important equation in startup economics: LTV:CAC. It tells you how much a customer is worth, which determines how much you can afford to spend acquiring them.

Improving LTV (through better retention, higher pricing, or expansion revenue) is often more impactful than acquiring new customers. A 10% improvement in retention can increase LTV by 30-50%, dramatically improving your unit economics without increasing your sales costs.

Formula

LTV = Average Revenue per Customer per Month / Monthly Churn Rate
Or: LTV = Average Revenue per Customer × Average Customer Lifespan

Example

Common mistakes

• 1Calculating LTV with an unrealistically low churn rate (which inflates the number)
• 2Not updating LTV calculations as your customer base and churn patterns change
• 3Using revenue LTV when you should be using gross margin LTV (which subtracts direct costs)