LTV (Lifetime Value)
The total gross profit a company expects to earn from a customer over the entire duration of their relationship.
LTV (or CLTV) estimates the total value a customer generates for a business across their entire relationship, typically calculated using average revenue per customer, gross margin, and expected customer lifespan (derived from churn rate). It's a forward-looking estimate, not a guaranteed number, and its accuracy depends heavily on how reliably churn rate can be projected.
LTV is almost always paired with CAC to evaluate whether a company's growth is fundamentally profitable at the unit level — a business can grow revenue quickly while still having broken unit economics if LTV doesn't comfortably exceed CAC once real costs are accounted for.
LTV is the gatekeeper metric for scaling a go-to-market motion. A company can grow revenue quickly while destroying value on every new customer if LTV doesn't cover CAC, and that flaw tends to surface in diligence when investors rebuild the numbers from cohort data.
Calculate it on gross profit, not revenue — revenue you don't keep can't pay back acquisition cost. And segment it: a blended ratio can hide a healthy enterprise motion alongside a self-serve motion that quietly loses money on every customer.
The churn input is where most LTV fiction lives. Because churn sits in the denominator, small changes swing the result enormously: 5% annual churn implies a 20-year customer life, while 15% implies under seven years. Early-stage companies should use observed cohort churn, label the uncertainty, and pair LTV with CAC payback, since a strong ratio with a very long payback can still be a cash problem.
LTV = (average revenue per customer x gross margin %) / churn rateA customer generates $12,000 per year in revenue, the company's gross margin is 75%, and annual churn is 15%. LTV = ($12,000 x 0.75) / 0.15 = $60,000.
Recalculate LTV using actual, cohort-based churn data as soon as you have enough customer history — early LTV estimates based on assumed churn rather than observed churn are frequently overoptimistic and get exposed in Series A or B diligence.
Why does LTV depend so heavily on churn rate?
Because churn determines expected customer lifespan — even a small difference in annual churn (say 5% vs 15%) dramatically changes how many years of revenue a typical customer is expected to generate, which compounds directly into LTV.
Should LTV use revenue or gross profit?
Gross profit. Using revenue overstates LTV by the entire cost of delivery.
How do early-stage companies estimate LTV without much churn data?
Carefully, with the uncertainty labeled: use churn actually observed in the oldest cohorts, stay conservative, and segment by customer type rather than blending everything into one number.
How sensitive is LTV to churn?
Very. Hypothetically, a customer paying $1,000 a month at an 80% gross margin produces $800 of monthly gross profit. At 2% monthly churn, LTV is $800 / 0.02 = $40,000; at 4% monthly churn it halves to $20,000.
Related terms
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