Growth & SaaS
Customer lifetime value (LTV)
Customer lifetime value is the gross profit a business expects to earn from an average customer over the whole time they stay.
LTV = (Average monthly revenue per customer × Gross margin) ÷ Monthly customer churn rate
Worked example
| Average revenue per customer | $500 a month |
| Gross margin | 80% |
| Monthly customer churn | 2% |
($500 × 80%) ÷ 2% = $400 ÷ 0.02 = $20,000
Why it matters
LTV sets the upper limit on what you can spend to win a customer. Paired with CAC, it tells you whether each new customer adds value or costs more than they will ever return.
Common mistakes
Where it misleads
Using revenue instead of gross profit, which overstates what a customer is worth.
Trusting a very low churn rate: 1% monthly churn implies customers stay about 100 months on average, longer than most companies have existed.
Using churn from a young or unusually loyal group of customers as if it applied to everyone.
Related terms
Keep reading
- LTV to CAC ratio (LTV:CAC)The LTV to CAC ratio compares the gross profit a customer is expected to bring in over their lifetime with the cost of acquiring them.
- Customer churn rateCustomer churn rate is the share of customers at the start of a period who cancel or stop paying during it.
- Gross marginGross margin is the share of revenue left after paying the direct costs of delivering what you sold.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.