What Is Customer Lifetime Value (LTV)? Formula and Uses

The LTV formula

The classic formula is LTV = average order value × purchase frequency × customer lifespan. Average order value is revenue divided by orders; frequency is how many times a typical customer buys per period; lifespan is how long they stay. Multiply the three and you have the total revenue a customer generates.

For subscriptions there is a shortcut: LTV ≈ average monthly revenue per customer ÷ monthly churn rate. If each customer pays $30 a month and 5% churn each month, LTV ≈ $30 ÷ 0.05 = $600 in revenue, because 1 ÷ churn approximates the average lifespan.

Why margin matters

Revenue LTV overstates a customer's real worth because it ignores the cost of goods sold. Multiply revenue LTV by gross margin to get profit LTV — the figure you should compare with CAC. A $720 revenue LTV at a 40% margin is really $288 of profit, and that is what has to beat your acquisition cost.

For longer lifespans, some teams also discount future cash flows to present value, since money earned in year three is worth less than money earned today. For most small businesses the simple margin-adjusted figure is accurate enough to make good decisions.

How to use LTV

The main use is setting how much you can afford to spend on acquisition. If a customer is worth $360 in profit, you can spend far more to win them than the LTV:CAC floor of 1:1 would allow — but you also should not chase the 3:1 target so hard that you starve growth. LTV also guides how much to invest in retention and support.

Segment LTV by customer type — plan, acquisition channel or first product. High-LTV segments deserve more acquisition budget and better service; low-LTV segments may be worth less effort. Small gains in retention or repeat frequency compound into large LTV increases over time.

Frequently asked questions

What is the difference between LTV and CLV?

None — they are the same metric. LTV (lifetime value) and CLV (customer lifetime value) both name the total profit a customer generates over the relationship. Different teams simply prefer different abbreviations.

Should LTV use revenue or profit?

Use profit when you compare LTV with CAC. Revenue LTV is easier to compute but overstates worth because it ignores costs. Multiplying by gross margin turns revenue LTV into profit LTV, which is the fair basis for the LTV:CAC ratio.

How does churn affect LTV?

Directly. Because average lifespan is roughly 1 ÷ churn rate, a lower churn rate stretches the lifespan and multiplies LTV. Cutting monthly churn from 5% to 4% raises the average lifespan from 20 to 25 months — a 25% jump in LTV with no change in pricing.

Is a higher LTV always better?

Usually, but not blindly. A high LTV only helps if you can acquire those customers profitably — LTV means nothing without a healthy LTV:CAC ratio. And a high average can hide the fact that a few big customers carry the rest, which is a concentration risk.