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Unit economics

LTV (Customer Lifetime Value)

The total gross profit expected from a customer across their whole relationship with you.

Lifetime value is what a customer is worth in gross profit before they leave. The common form is:

LTV = (ARPA × gross margin) ÷ customer churn rate

That formula assumes a constant churn rate, which is almost never true: real churn is high early and falls as a cohort matures. Where the retention curve flattens, the simple formula understates LTV; where it never flattens, the formula produces a large number for a business that does not actually retain anyone.

Treat LTV as a directional figure and prefer CAC payback for decisions that involve cash. If you do report LTV, cap it at a horizon you can defend, typically three years, rather than integrating to infinity.

Related terms

  • CAC (Customer Acquisition Cost) Total sales and marketing spend in a period divided by the customers acquired in it.
  • LTV:CAC ratio Lifetime value divided by acquisition cost. A rule of thumb for whether growth spending is productive.
  • Retention curve The share of a cohort still active plotted against months since they started. Whether it flattens is the single most important thing about it.
  • Customer churn The share of customers who cancelled in a period, counted as logos rather than as revenue.