Customer Lifetime Value (LTV)
Total revenue expected from a customer over entire relationship
Definition
Customer Lifetime Value (LTV or CLTV) predicts the total revenue a business can expect from a single customer account over the entire duration of their relationship. Formula: LTV = Average Purchase Value × Purchase Frequency × Average Customer Lifespan. For subscription businesses: LTV = Monthly Recurring Revenue × Gross Margin % ÷ Monthly Churn Rate. LTV determines how much you can afford to spend on customer acquisition (ideally LTV should be 3x Customer Acquisition Cost). Understanding LTV helps prioritize customer retention, identify most valuable customer segments, and make informed decisions about marketing investment and product development.
Real-World Example
A SaaS company has customers paying $500/month on average with 95% monthly retention (5% churn) and 70% gross margin. LTV = ($500 × 0.70) ÷ 0.05 = $7,000. This means each customer is worth $7,000 over their lifetime, so the company can profitably spend up to $2,300 (1/3 of LTV) to acquire each customer.
Related Terms
Customer Acquisition Cost (CAC)
Analytics & MetricsTotal cost to acquire a new customer including all marketing and sales expenses
Churn Rate
Analytics & MetricsPercentage of customers who stop using your product or service over a time period
Retention Rate
Analytics & MetricsPercentage of customers who continue doing business with you over time
Marketing ROI (Return on Investment)
Analytics & MetricsMeasure of revenue generated compared to marketing spend
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