What is Lifetime Value of Customer (LTV)?
Lifetime Value of Customer (LTV or CLTV) is the predicted total net contribution a customer will generate across the entire customer relationship. LTV is the demand-side anchor of unit economics: every customer acquisition decision should be evaluated against an honest LTV estimate.
Formula
Simple LTV (subscription):
LTV = ARPU × Gross Margin ÷ Monthly Churn Rate
For a $100/month plan with 80% gross margin and 2% monthly churn: LTV = $100 × 0.80 ÷ 0.02 = $4,000. Sophisticated models layer in retention, expansion revenue (NRR > 100%) and a discount rate for time value of money — particularly important for multi-year contracts.
LTV:CAC ratio benchmarks
- LTV:CAC ≥ 3× — healthy unit economics, capital-efficient growth.
- LTV:CAC ≥ 5× — likely underspending on acquisition; you can step on the gas.
- LTV:CAC < 1× — you lose money on every customer; do not scale paid acquisition.
- CAC payback ≤ 12–18 months — invested cash returns inside a reasonable horizon.
Common LTV mistakes
Do: use gross margin (not revenue), model by segment, and validate against cohort data once you have 24+ months of history.
Don’t: use revenue-based LTV — it overstates value because it ignores COGS. Don’t extrapolate from a 6-month dataset; early adopters churn very differently from the steady-state base. And don’t anchor pricing or CAC decisions on a single LTV figure when your customer base is heterogeneous.
For pitch decks and DD, present LTV with its underlying assumptions (margin, churn, expansion) made explicit — see the VC DD checklist.