Lifetime Value (LTV)

Also known as: LTVCLVCustomer Lifetime ValueCLTVLifetime Revenue

LTV = ARPU ÷ Monthly Churn Rate

💡The Concept

Lifetime Value is the total revenue you can expect from a single customer over the entire duration of your relationship. It is the most critical number for understanding how much you can afford to spend on acquiring customers. The simplest formula: LTV = ARPU ÷ Monthly Churn Rate. A customer paying $100/month with 5% monthly churn has an LTV of $2,000. Netflix's LTV exceeds $1,200 per subscriber because churn is below 2.5% — this justifies their $17B+ annual content spend. LTV is the roof of your building: it determines the maximum CAC you can afford, the features you can build, and the team you can hire.

⚠️The Trap

Most founders massively overestimate LTV by assuming customers will stay forever. In reality, early-stage startups have limited cohort data. A startup with 6 months of history claiming $3,000 LTV is extrapolating a trend that hasn't been validated. Use conservative estimates (12-24 months cap) until you have 3+ cohorts with 12+ months of data. Also, LTV should be calculated on gross margin, not revenue — a $2,000 LTV with 50% gross margin means only $1,000 in actual profit to cover acquisition costs.

🎯The Action

Calculate LTV two ways: (1) Simple: ARPU ÷ Monthly Churn Rate. (2) Cohort-based: track actual revenue from each monthly cohort over time. Compare them — if your cohort LTV is lower than your formula LTV, your churn rate is misleading you (possibly due to early-life churn spikes). Always report Gross Margin-adjusted LTV: LTV × Gross Margin. This is the number that matters for unit economics.

⚡Pro Tips

LTV has a compounding relationship with churn. Reducing monthly churn from 5% to 4% increases LTV by 25% (from $2,000 to $2,500 at $100 ARPU). Reducing from 3% to 2% increases LTV by 50%. The lower your churn, the more valuable each percentage point improvement becomes.

Track LTV by acquisition channel. Customers from referrals typically have 2-3x higher LTV than customers from paid ads because referrals come pre-screened for product fit.

LTV should increase over time for healthy businesses through expansion revenue. If a customer starts at $50/month and grows to $200/month over 2 years, your LTV model based on initial ARPU underestimates the customer's true value.

🚫Common Myths

✗Myth: “LTV:CAC of 3:1 means your business is healthy”

✓Reality: 3:1 is the MINIMUM for viability, not a sign of health. It also depends on payback period — a 3:1 ratio with a 24-month payback period means you're capital-starved for 2 years per customer. A 3:1 ratio with 6-month payback is far better because cash recycles faster.

✗Myth: “Maximize LTV at all costs”

✓Reality: LTV maximization can conflict with growth. Locking customers into 3-year contracts maximizes LTV but slows initial adoption. Freemium models sacrifice early LTV for market penetration, betting that network effects or upsells will compensate. The right LTV target depends on your growth strategy.