Customer Lifetime Value (LTV)

What Is Customer Lifetime Value (LTV)?

LTV (Customer Lifetime Value) estimates the total profit generated from a customer over their lifetime. A simple calculation: customer's annual profit multiplied by average lifetime (in years). For example, if a customer spends $1,000/year and stays 5 years, LTV is $5,000. LTV is often calculated excluding acquisition costs (gross LTV) or including them (net LTV).

LTV guides sustainable growth: you shouldn't spend more to acquire a customer than they'll generate in profit. The LTV:CAC ratio (LTV divided by CAC) indicates business health: ratios above 3:1 are generally healthy, above 5:1 are excellent. Improving LTV—by increasing customer spend (expansion revenue), extending customer lifetime (reducing churn), or reducing operational costs—improves business sustainability.

LTV is future-facing: it requires estimating retention and spend. Cohort analysis (tracking customer groups over time) provides empirical LTV data. Early-stage companies estimate LTV, while mature companies calculate it from historical data. Improving LTV is often higher-impact than improving CAC because it compounds over customer lifetime.