What is Customer lifetime value (LTV)?
Customer lifetime value (LTV, sometimes CLV) is the total profit a customer generates over the whole time they stay. For a subscription it is roughly average revenue per account times gross margin, divided by churn rate. Its only real job is to be compared against what that customer cost to acquire.
The formula
For recurring revenue, the standard approximation is:
LTV = (average revenue per account × gross margin) ÷ monthly churn rateAt $20 a month, 90% margin and 4% monthly churn: (20 × 0.9) ÷ 0.04 = $450.
Note what the division by churn does. Cutting churn from 4% to 2% doubles LTV without changing price, product or a single acquisition decision — which is why retention work often beats acquisition work on the same budget.
The ratio that actually matters
LTV alone is a vanity number. Paired with acquisition cost, it becomes a decision:
| LTV : CAC | What it means |
|---|---|
| Below 1:1 | Every new customer loses money |
| 1:1 – 3:1 | Thin. Growth is buying revenue, not profit |
| Around 3:1 | The conventional healthy target |
| Above 5:1 | Probably underspending on acquisition |
A very high ratio is not a trophy. It usually means there is profitable demand you are not buying.
Where it goes wrong
- Revenue instead of profit. Using revenue rather than gross margin inflates LTV by whatever your costs are. At 40% margin it overstates by two and a half times.
- Blended when it should be split. LTV varies enormously by acquisition channel. A blended figure hides the channel bringing in customers who churn in month two.
- Early-stage extrapolation. With six months of history you cannot know the lifetime of a customer who may stay four years. Early LTV estimates are directional at best; say so when you quote them.
- Survivorship. Averaging only over customers who are still around measures the ones who did not leave.