Customer lifetime value (LTV, CLV)

The formula

• LTV = A · m / c

A is the average revenue per customer and month, m the gross margin in per cent and c the share of customers lost each month, also in per cent. The two percentages cancel: 60 / 5 is the same as 0.6 / 0.05.

A worked example

A subscription brings 200 a month per customer at a 60% gross margin, and 5% of the customers leave each month: LTV = 200 · 60 / 5 = 2,400. Halve the churn to 2.5% and the same customer is worth 4,800.

Why dividing by churn gives a lifetime

If 5% of the customers leave each month, the average customer stays 1 / 0.05 = 20 months. Twenty months of 200 is 4,000 in revenue, and 60% of that is the 2,400 above. The formula is that reasoning in one line: A · m is the gross profit a month, and 1 / c the months it lasts. The expectation holds when the churn is the same every month, which is the assumption to question first.

LTV against CAC

The number is read against what the customer cost to win, the customer acquisition cost. An LTV of 2,400 and a CAC of 250 is a ratio of 9.6; a ratio near 1 means the business pays as much to win a customer as the customer ever brings.

Common mistakes

• Using revenue instead of gross profit. Without the margin the LTV is the lifetime revenue, a larger number that pays for nothing.
• Mixing a monthly churn with a yearly revenue. A, m and c have to share one period.
• Reading it as a guarantee. A churn measured on last year’s customers says what this year’s are expected to do, not what they will.

Frequently asked questions