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 × Gross margin) / Churn rate.
- Example: $100/mo, 80% margin, 5% monthly churn equals ($100 × 0.8) / 0.05 = $1,600.
- A common rule of thumb is an LTV:CAC ratio of 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 reducing churn is one powerful way to increase it.
