LTV (Customer Lifetime Value)

Lifetime Value (LTV) estimates the total revenue a company will earn from a single customer over the entire relationship. The basic formula for subscription businesses is: average monthly revenue per customer divided by monthly churn rate. More sophisticated models factor in expansion revenue, gross margin, and discount rates for the time value of money.

LTV is critical because it sets the ceiling for how much you can spend to acquire a customer while remaining profitable. If your LTV is $10,000, you can afford a $3,000 CAC and still generate healthy returns. If your LTV is $500, you need a much cheaper acquisition strategy. This is why improving retention and expanding revenue from existing customers can be more impactful than reducing acquisition costs.

Calculating LTV accurately requires enough historical data to estimate churn and expansion rates. Early-stage startups with limited history often overestimate LTV by assuming lower churn than they will actually experience. Investors discount LTV projections from companies with less than 12-18 months of cohort data. When in doubt, use conservative assumptions.