Customer Lifetime Value (LTV)

What LTV actually means

Lifetime value estimates what one customer is worth over the entire relationship. The most common error is using revenue instead of gross profit. A customer paying 100 dollars a month at a 20 percent margin is worth a fifth of a customer paying the same at 100 percent margin, and only the margin-adjusted figure can be compared honestly against acquisition cost. LTV is a forecast, not a fact, so the assumptions behind it deserve as much scrutiny as the output.

Worked example

A subscription business charges 100 dollars a month, runs a 75 percent gross margin, and sees customers stay 30 months on average. LTV is 100 times 0.75 times 30, or 2,250 dollars. If retention worsens and average lifespan falls to 20 months, LTV drops to 1,500 dollars without a single change to price or margin.

Why the board cares

LTV is the ceiling on what the company can afford to pay for growth. It is also the metric most vulnerable to optimistic assumptions, so boards probe the lifespan input hardest. A model built on 36 months of assumed retention at a company that is 18 months old is a projection dressed as evidence, and experienced directors will say so out loud.

Benchmarks and rules of thumb

Cohort-based LTV beats a single blended average every time. Segment by acquisition channel and by first product purchased, because those two cuts usually explain most of the variance.

Common mistakes

• Using revenue rather than gross profit, which inflates LTV by the entire cost of delivery.
• Assuming a customer lifespan longer than the company has existed, so no real cohort can validate it.
• Reporting one company-wide LTV when enterprise and self-serve customers behave nothing alike.

Related terms

• Customer Acquisition Cost (CAC)
• LTV to CAC Ratio
• Churn Rate
• Net Revenue Retention (NRR)
• Average Revenue Per User (ARPU)
• Cohort Analysis

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