What is LTV (customer lifetime value)?

The short definition

Lifetime value answers one question: what is a new customer worth? For a subscription product, a customer pays a roughly steady amount each month until they cancel. Multiply what they pay by how long they stay and you have their lifetime value.

Because how long they stay is about one divided by monthly churn, the usual formula is:

LTV = ARPU x gross margin / monthly churn

where ARPU is average monthly revenue per customer. $30 a month, 80% margin and 4% churn gives $30 x 0.8 / 0.04 = $600.

Revenue LTV or margin LTV

Some tools leave margin out. Stripe's Billing analytics, for example, calculates subscriber lifetime value as ARPU divided by subscriber churn rate, which is lifetime revenue. Including gross margin (revenue left after hosting, payment fees and support) gives lifetime gross profit, which is the number to use when deciding what you can spend to win a customer.

Neither is wrong. They answer different questions, so say which one you mean.

LTV and CAC

LTV is most useful next to CAC, the cost of acquiring a customer. If a customer is worth $600 in gross profit and costs $150 to win, every new customer pays back four times over. If they cost $700 to win, growth loses money.

A ratio of about 3 : 1 is a rule of thumb often quoted for SaaS. Bootstrapped makers who grow through content and communities mostly spend time rather than money, so CAC is hard to pin down; LTV still tells you how much a cut in churn is worth. Try both in the LTV calculator.

Where it goes wrong

LTV assumes churn stays flat, and early on it does not. With 30 customers, one cancellation moves churn, and LTV with it, a lot. A month with no cancellations makes the formula divide by zero, which does not make customers priceless. Use a few months of churn, treat the answer as a range, and recalculate every quarter. The churn rate entry covers how to measure the input.