Also called: LTV · CLV
Customer lifetime value (LTV), also called CLV, is the total gross margin a company expects to earn from a customer over the full length of that relationship, used alongside CAC to judge whether acquisition spend is worth it.
LTV estimates the total value a customer generates over the full length of their relationship with a company, not just one contract or one year. A common shorthand in a subscription business is average revenue per account, times gross margin percentage, divided by churn rate, since churn rate acts as a rough proxy for how long the average customer sticks around. A lower churn rate produces a longer expected relationship and a higher LTV, even with identical monthly revenue per account.
LTV by itself doesn't say much. A high LTV on a customer base that costs a fortune to acquire can still be a weak business, and a modest LTV against a very cheap CAC can be a strong one. The two get read as a ratio, LTV divided by CAC, and that ratio is one of the more common ways a business checks whether its acquisition spend is generating durable value or just buying revenue that costs more to win than it's ultimately worth.
LTV is also a forward-looking estimate, not a measured historical fact, since it depends on assumptions about future churn and future gross margin holding steady. A business whose churn rate is trending upward keeps overstating LTV every time it runs the formula off a stale, lower churn figure from an earlier period.
Recalculate LTV on a recent, rolling churn figure rather than a historical average. A business with rising churn keeps overstating LTV, and therefore overstating LTV:CAC, until the churn number in the formula gets updated.
LTV gets treated as a fixed, known number instead of an estimate built on assumptions that can go stale fast. The most common mistake is holding churn rate constant in the formula long after the real churn rate has moved, which makes the ratio look healthier than the underlying business actually is.
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