What it is
LTV is the total value a customer generates across their whole relationship with you. Done properly, it's measured in gross profit, not raw revenue.
Facts
- A common formula: LTV = (Average revenue per customer x Gross margin) / Churn rate.
- Example: $100/mo, 80% margin, 5% monthly churn -> ($100 x 0.8) / 0.05 = $1,600.
- The target LTV:CAC ratio is 3:1 or higher.
- Lower churn dramatically raises LTV, because customers stay (and pay) longer.
Who it's for
Subscription and repeat-purchase businesses evaluating whether acquisition spending pays off.
How it helps you
LTV sets the ceiling on what you can profitably spend to acquire a customer and highlights how much retention drives long-term value.
Caveats
Using revenue instead of gross profit overstates LTV. Early-stage churn estimates are unreliable, so treat young LTV numbers as rough, not gospel.
Conclusion
LTV is the value side of unit economics; compute it on gross profit, compare it to CAC, and remember that cutting churn is the fastest way to grow it.