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Glossary

What is LTV (customer lifetime value)?

LTV: LTV (customer lifetime value) is the total gross profit you expect one customer to generate between the first purchase and the last, usually estimated from yearly revenue, gross margin and churn.

Also called: customer lifetime value, CLV, CLTVUpdated

LTV is the total gross profit a customer is expected to bring to a company from the first purchase to the last. It tells you how much you can afford to spend on winning a customer.

For subscriptions the standard estimate is:

LTV = (yearly revenue per customer × gross margin) ÷ annual churn rate

The churn rate is the share of customers who leave in a year. Its inverse is the expected lifetime: 35% churn means 1 ÷ 0.35 = 2.9 years. Yearly revenue per customer is ARR divided by the number of customers.

A worked example

A software company's customers pay €23,700 a year at an 84% gross margin. Assume 35% of customers leave each year.

  • Gross profit per customer and year: €23,700 × 84% = €19,908.
  • Expected lifetime: 1 ÷ 0.35 = 2.9 years.
  • LTV: €19,908 ÷ 0.35 = €56,880.
  • CAC: €18,250.
  • LTV/CAC: €56,880 ÷ €18,250 = 3.1.

Two details matter. First, the 35% is an assumption. The company has not lost a customer yet, so there is no churn history; it uses a cautious figure and says so. Second, using revenue instead of gross profit would give €23,700 ÷ 0.35, about €67,700, which is 19% too high.

How to use LTV well

  1. Base it on gross profit, not revenue.
  2. State the churn assumption and its source: a cohort, a benchmark or a cautious guess.
  3. Never divide by zero churn. No churn so far does not mean customers stay forever. Cap the lifetime at a horizon you can defend.
  4. Calculate it per segment when customer types differ in price or churn.
  5. Show it next to CAC. LTV alone does not say whether growth is affordable. The ratio LTV/CAC does, as part of unit economics.

Typical mistakes

  • Revenue instead of gross profit.
  • An endless lifetime drawn from a short history.
  • One average for different segments, such as small and large customers.
  • LTV without CAC.
  • Mixed time frames, such as the lifetime value of old customers against today's acquisition cost.

Simple LTV ignores two things: the discounting of future profit and expansion revenue from upsells. You can add both when the data supports it. For a pitch, the simple version with its assumptions stated is common.

FAQ

Frequently asked questions

How do you calculate LTV?

Multiply yearly revenue per customer by gross margin and divide by the annual churn rate. For €23,700 of revenue, an 84% margin and 35% churn, LTV is €23,700 × 84% ÷ 35% = €56,880.

What is a good LTV/CAC ratio?

A common rule of thumb for subscription software, popularized by David Skok (SaaS Metrics 2.0, 2013), is at least 3, meaning a customer returns three times its acquisition cost in gross profit. Read the ratio together with CAC payback, because a high ratio can still tie up cash for years.

Is LTV the same as CLV?

Yes. LTV, CLV and CLTV are different abbreviations for customer lifetime value.

How do you estimate LTV when you have no churn history?

Use an explicit, cautious churn assumption, a benchmark from comparable companies or the churn of your first cohorts, and label it as an assumption. Replace it with your own data as soon as you have enough.

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