Lifetime Value
Growth
Efficiency
Industry:
Sector Agnostic
Short Definition
Customer Lifetime Value (LTV) estimates the total gross profit a company expects to earn from a single customer over the entire period that customer remains active. It captures how much long‑term value each acquired customer contributes to the business, after accounting for the cost to serve them.
Short Definition
Customer Lifetime Value (LTV) estimates the total gross profit a company expects to earn from a single customer over the entire period that customer remains active. It captures how much long‑term value each acquired customer contributes to the business, after accounting for the cost to serve them.
Short Definition
Customer Lifetime Value (LTV) estimates the total gross profit a company expects to earn from a single customer over the entire period that customer remains active. It captures how much long‑term value each acquired customer contributes to the business, after accounting for the cost to serve them.
Why it matters for Investors
Unit Economics Insight – LTV sits at the core of startup economics. Comparing LTV shows whether growth is sustainable or capital‑destructive.
Retention Signal – High LTV implies strong customer loyalty and pricing power; weak LTV points to churn or poor monetization.
Valuation Driver – LTV helps investors model customer cohorts, margin expansion potential, and total addressable value capture.
Scalability Test – If LTV grows faster than CAC, the business can compound efficiently as it scales customer acquisition.
Why it matters for Investors
Unit Economics Insight – LTV sits at the core of startup economics. Comparing LTV shows whether growth is sustainable or capital‑destructive.
Retention Signal – High LTV implies strong customer loyalty and pricing power; weak LTV points to churn or poor monetization.
Valuation Driver – LTV helps investors model customer cohorts, margin expansion potential, and total addressable value capture.
Scalability Test – If LTV grows faster than CAC, the business can compound efficiently as it scales customer acquisition.
Why it matters for Investors
Unit Economics Insight – LTV sits at the core of startup economics. Comparing LTV shows whether growth is sustainable or capital‑destructive.
Retention Signal – High LTV implies strong customer loyalty and pricing power; weak LTV points to churn or poor monetization.
Valuation Driver – LTV helps investors model customer cohorts, margin expansion potential, and total addressable value capture.
Scalability Test – If LTV grows faster than CAC, the business can compound efficiently as it scales customer acquisition.
Formula
where:
ARPC = Average Revenue per Customer (for a given period)
Gross Margin % = Fraction of revenue retained after variable costs
Churn Rate % = Rate at which users stop transacting over that same period
Practical considerations:
Use gross profit, not revenue: This adjusts for cost of service — investors want true economic value, not top‑line inflow.
Churn accuracy matters: Even small errors in churn heavily influence lifetime estimates.
Cohort approach: Calculate by acquisition cohort to see how value improves over time.
Segment by product or customer type: Enterprise vs. SMB vs. consumer cohorts may have very different LTVs.
Currency & unit consistency: Match churn’s time period with ARPC’s (monthly, annual).
Exclude one‑off deals: Restrict to repeatable, predictable revenue streams for clarity.
Formula
where:
ARPC = Average Revenue per Customer (for a given period)
Gross Margin % = Fraction of revenue retained after variable costs
Churn Rate % = Rate at which users stop transacting over that same period
Practical considerations:
Use gross profit, not revenue: This adjusts for cost of service — investors want true economic value, not top‑line inflow.
Churn accuracy matters: Even small errors in churn heavily influence lifetime estimates.
Cohort approach: Calculate by acquisition cohort to see how value improves over time.
Segment by product or customer type: Enterprise vs. SMB vs. consumer cohorts may have very different LTVs.
Currency & unit consistency: Match churn’s time period with ARPC’s (monthly, annual).
Exclude one‑off deals: Restrict to repeatable, predictable revenue streams for clarity.
Formula
where:
ARPC = Average Revenue per Customer (for a given period)
Gross Margin % = Fraction of revenue retained after variable costs
Churn Rate % = Rate at which users stop transacting over that same period
Practical considerations:
Use gross profit, not revenue: This adjusts for cost of service — investors want true economic value, not top‑line inflow.
Churn accuracy matters: Even small errors in churn heavily influence lifetime estimates.
Cohort approach: Calculate by acquisition cohort to see how value improves over time.
Segment by product or customer type: Enterprise vs. SMB vs. consumer cohorts may have very different LTVs.
Currency & unit consistency: Match churn’s time period with ARPC’s (monthly, annual).
Exclude one‑off deals: Restrict to repeatable, predictable revenue streams for clarity.
Worked Example
Component | Value | Notes |
|---|---|---|
Average Revenue per Customer (ARPC, Monthly) | $20 | Revenue per paying user per month |
Gross Margin | 80% | After deducting variable (COGS) costs |
Monthly Churn Rate | 5% | 5% of customers leave each month |
LTV per Customer | (20 × 0.8) / 0.05 = $320 | Expected lifetime gross profit per customer |
If average CAC per user is $80, the LTV/CAC ratio = 4.0×, indicating strong payback economics.
Notes:
The formula assumes stable ARPC and churn; cohort modeling can refine further.
For subscription models, lifetime ≈ 1 / churn (so at 5% churn → average life of 20 months).
A rising LTV may reflect product improvements, upsell success, or user retention efficiency.
If ARPC rises, churn drops, or margins improve → LTV increases.
Worked Example
Component | Value | Notes |
|---|---|---|
Average Revenue per Customer (ARPC, Monthly) | $20 | Revenue per paying user per month |
Gross Margin | 80% | After deducting variable (COGS) costs |
Monthly Churn Rate | 5% | 5% of customers leave each month |
LTV per Customer | (20 × 0.8) / 0.05 = $320 | Expected lifetime gross profit per customer |
If average CAC per user is $80, the LTV/CAC ratio = 4.0×, indicating strong payback economics.
Notes:
The formula assumes stable ARPC and churn; cohort modeling can refine further.
For subscription models, lifetime ≈ 1 / churn (so at 5% churn → average life of 20 months).
A rising LTV may reflect product improvements, upsell success, or user retention efficiency.
If ARPC rises, churn drops, or margins improve → LTV increases.
Worked Example
Component | Value | Notes |
|---|---|---|
Average Revenue per Customer (ARPC, Monthly) | $20 | Revenue per paying user per month |
Gross Margin | 80% | After deducting variable (COGS) costs |
Monthly Churn Rate | 5% | 5% of customers leave each month |
LTV per Customer | (20 × 0.8) / 0.05 = $320 | Expected lifetime gross profit per customer |
If average CAC per user is $80, the LTV/CAC ratio = 4.0×, indicating strong payback economics.
Notes:
The formula assumes stable ARPC and churn; cohort modeling can refine further.
For subscription models, lifetime ≈ 1 / churn (so at 5% churn → average life of 20 months).
A rising LTV may reflect product improvements, upsell success, or user retention efficiency.
If ARPC rises, churn drops, or margins improve → LTV increases.
Best Practices
Align with CAC: Always analyze LTV; target at least a 3:1 ratio for sustainable growth.
Update regularly: Recalculate quarterly as pricing, churn, and cost structure evolve.
Benchmark by segment: Compare enterprise vs. SMB LTV to guide where to double down investment.
Include margin in LTV: Revenue‑based LTVs overstate true value; investors discount them.
Use cohort or predictive modeling: Avoid relying on simple averages in fast‑changing businesses.
Best Practices
Align with CAC: Always analyze LTV; target at least a 3:1 ratio for sustainable growth.
Update regularly: Recalculate quarterly as pricing, churn, and cost structure evolve.
Benchmark by segment: Compare enterprise vs. SMB LTV to guide where to double down investment.
Include margin in LTV: Revenue‑based LTVs overstate true value; investors discount them.
Use cohort or predictive modeling: Avoid relying on simple averages in fast‑changing businesses.
Best Practices
Align with CAC: Always analyze LTV; target at least a 3:1 ratio for sustainable growth.
Update regularly: Recalculate quarterly as pricing, churn, and cost structure evolve.
Benchmark by segment: Compare enterprise vs. SMB LTV to guide where to double down investment.
Include margin in LTV: Revenue‑based LTVs overstate true value; investors discount them.
Use cohort or predictive modeling: Avoid relying on simple averages in fast‑changing businesses.
FAQs
What’s the main difference between LTV per customer and LTV per user?
LTV per customer measures value from paying customers (the investor standard); LTV per user includes all users, even free ones, and is used mainly for consumer or freemium analytics.How does LTV influence valuation?
Higher, proven LTV — especially improving cohort LTV over time — justifies stronger forward revenue multiples. Investors view it as embedded future cash flow efficiency and customer retention durability.What exactly does “lifetime” mean in LTV?
“Lifetime” refers to the average duration a customer stays active and generates revenue — not necessarily their literal lifespan. It’s usually derived from revenue churn rate or gross dollar retention rate. For example, if your monthly churn is 5%, the average customer lifetime ≈ 1 / 0.05 = 20 months.
FAQs
What’s the main difference between LTV per customer and LTV per user?
LTV per customer measures value from paying customers (the investor standard); LTV per user includes all users, even free ones, and is used mainly for consumer or freemium analytics.How does LTV influence valuation?
Higher, proven LTV — especially improving cohort LTV over time — justifies stronger forward revenue multiples. Investors view it as embedded future cash flow efficiency and customer retention durability.What exactly does “lifetime” mean in LTV?
“Lifetime” refers to the average duration a customer stays active and generates revenue — not necessarily their literal lifespan. It’s usually derived from revenue churn rate or gross dollar retention rate. For example, if your monthly churn is 5%, the average customer lifetime ≈ 1 / 0.05 = 20 months.
FAQs
What’s the main difference between LTV per customer and LTV per user?
LTV per customer measures value from paying customers (the investor standard); LTV per user includes all users, even free ones, and is used mainly for consumer or freemium analytics.How does LTV influence valuation?
Higher, proven LTV — especially improving cohort LTV over time — justifies stronger forward revenue multiples. Investors view it as embedded future cash flow efficiency and customer retention durability.What exactly does “lifetime” mean in LTV?
“Lifetime” refers to the average duration a customer stays active and generates revenue — not necessarily their literal lifespan. It’s usually derived from revenue churn rate or gross dollar retention rate. For example, if your monthly churn is 5%, the average customer lifetime ≈ 1 / 0.05 = 20 months.
Related Metrics
Commonly mistaken for:
ARPU (Average Revenue per User) (includes non-paying users)
Customer Lifetime (Tenure) (Duration a user stays active before churning; LTV builds on this by adding revenue and margin impact)
Gross Margin per User (Profit per user per period (ARPC × margin); a component of LTV but without churn or retention effects)
Related Metrics
Commonly mistaken for:
ARPU (Average Revenue per User) (includes non-paying users)
Customer Lifetime (Tenure) (Duration a user stays active before churning; LTV builds on this by adding revenue and margin impact)
Gross Margin per User (Profit per user per period (ARPC × margin); a component of LTV but without churn or retention effects)
Related Metrics
Commonly mistaken for:
ARPU (Average Revenue per User) (includes non-paying users)
Customer Lifetime (Tenure) (Duration a user stays active before churning; LTV builds on this by adding revenue and margin impact)
Gross Margin per User (Profit per user per period (ARPC × margin); a component of LTV but without churn or retention effects)
Source of:
Components:
Index