Lifetime Value (LTV)
Total projected revenue from a customer over their entire relationship.
LTV = ARPU × Gross Margin % × (1 / Churn Rate)
E-commerce: Avg. order value × Purchase frequency × Avg. customer lifespan
What it measures
Projected total revenue from a customer over their entire relationship with your product. LTV is an estimate based on historical patterns.
Calculation Variants
- Historic LTV
- Sum of gross revenue from all past purchases of a customer cohort. Accurate but backward-looking.
- Predictive LTV
- (ARPA × Gross Margin) / Customer Churn Rate. The SaaS standard. Assumes churn remains constant.
- Gross Margin LTV
- Same as predictive, but multiplied by Gross Margin %. This is the ONLY acceptable LTV for LTV:CAC ratios, as it accounts for the cost of serving the customer.
What to watch
- Rising: Customers are staying longer, spending more, or both. The critical ratio is LTV:CAC. Most healthy businesses target at least 3:1 (every dollar spent acquiring a customer returns three dollars).
- Falling: Investigate whether it's driven by shorter lifespans (retention problem), lower spending (engagement or pricing problem), or both. Segment by acquisition channel, as some sources may deliver lower-quality customers.
In practice
An e-commerce company launched a loyalty program and saw LTV rise from $180 to $245, a 36% increase. But CAC also rose 25% because the loyalty program's marketing costs weren't attributed. When they calculated LTV:CAC, it only improved from 2.4:1 to 2.6:1, prompting them to optimize the program's costs.
Illustrative scenario — a representative composite, not a specific company.
Related: LTV:CAC Ratio — the fundamental unit economics equation.; Churn Rate — directly impacts LTV.