LTV meaning — Lifetime Value

What is LTV?

LTV (Customer Lifetime Value) is the total gross profit a customer generates over the whole relationship. The standard calculation multiplies average revenue per account by gross margin, then divides by the churn rate — so a $2,000-a-month customer at 80% margin with 2% monthly churn is worth around $80,000. The sensitivity to churn is the part most people underestimate: halving churn from 4% to 2% doubles LTV without changing price or product. Two cautions. Using revenue rather than gross profit inflates the figure by whatever your cost of service is. And in a young business, churn estimates are unreliable, so LTV becomes a projection dressed as a measurement — useful for comparing segments against each other, dangerous as an absolute number to plan spend against.

When to use LTV

• Setting a sensible acquisition-cost ceiling per segment
• Prioritising retention work against new-logo work
• Comparing the long-term value of different customer segments

Real examples

• $2,000 MRR × 80% margin ÷ 2% monthly churn = $80,000 LTV.
• Halving churn to 1% doubles LTV to $160,000 with no other change.
• With a $15K CAC and an $80K LTV, the ratio is 5.3:1 — comfortably healthy.

Common mistakes

• Using revenue rather than gross profit, which overstates value by the cost of serving the customer.
• Applying an optimistic churn rate from too short a history.
• Blending segments so an enterprise cohort's value masks an unprofitable SMB one.

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