Quick Summary
LTV represents the total monetary value of a customer relationship over time. It helps businesses understand how much they can afford to spend on customer acquisition.
Lifetime Value (LTV or CLV - Customer Lifetime Value) is the total revenue a business expects to earn from a customer throughout their entire relationship. It is a crucial metric for understanding customer profitability and guiding marketing investment decisions.
LTV Formula
Simple LTV = Average Purchase Value × Purchase Frequency × Customer Lifespan
Subscription LTV = Average Revenue Per User (ARPU) / Churn Rate
Traditional LTV = (Average Revenue Per Customer × Gross Margin) / Churn Rate
Components of LTV
- Average Revenue Per User (ARPU): Monthly or annual revenue per customer
- Gross Margin: Revenue minus cost of goods/services
- Churn Rate: Percentage of customers lost per period
- Customer Lifespan: Average duration of customer relationship
- Expansion Revenue: Upsells, cross-sells, upgrades
Example Calculation
Subscription Business Example:
- Monthly Subscription: ₹1,000
- Gross Margin: 80%
- Monthly Churn Rate: 5%
- LTV = (₹1,000 × 0.80) / 0.05 = ₹16,000
LTV:CAC Ratio
The ratio of Lifetime Value to Customer Acquisition Cost is a critical metric:
| LTV:CAC Ratio | Interpretation |
|---|---|
| Below 1:1 | Unsustainable - losing money on every customer |
| 1:1 to 2:1 | At risk - low margins for growth investment |
| 3:1 | Good - healthy unit economics |
| 5:1+ | Excellent - strong value delivery |
Strategies to Increase LTV
- Improve Retention: Reduce churn through better product and support
- Upselling: Move customers to higher-tier plans
- Cross-selling: Offer complementary products/services
- Usage Expansion: Increase product adoption and engagement
- Annual Plans: Encourage longer commitments with discounts
- Loyalty Programs: Reward long-term customers
LTV Cohorts
Analyze LTV by customer cohorts to understand trends:
- Acquisition Cohorts: Group by when customers signed up
- Channel Cohorts: Group by acquisition channel
- Plan Cohorts: Group by subscription tier
- Compare to see which segments have highest LTV
Key Points
- Total revenue expected from a customer
- Critical for determining CAC budget
- LTV:CAC ratio of 3:1 is ideal
- Higher retention increases LTV
- Expansion revenue boosts LTV
- Calculated differently for different business models