Customer Lifetime Value (LTV)

Customer Lifetime Value (LTV, also written as CLV or CLTV) estimates the total revenue a customer will generate before they churn. The simplest formula is: LTV = ARPU / Churn Rate. If the average customer pays $100/month and the monthly churn rate is 5%, the LTV is $100 / 0.05 = $2,000. More sophisticated models discount future revenue to present value and account for expansion revenue over time.

LTV is one of the most important strategic metrics because it sets the ceiling for customer acquisition and retention spending. The common benchmark is that LTV should be at least 3x the Customer Acquisition Cost (CAC). A business with an LTV of $2,000 should spend no more than about $667 to acquire a customer to maintain a healthy LTV:CAC ratio.

Several factors influence LTV: average revenue per user, retention rate, expansion rate, and gross margin. Of these, retention has the most dramatic impact due to compounding. Improving monthly retention from 95% to 97% does not sound significant, but it increases average customer lifetime from 20 months to 33 months — a 65% improvement in LTV.

LTV calculations become more nuanced when segmented by cohort, plan tier, acquisition channel, or customer size. Enterprise customers typically have much higher LTV than SMB customers, both because they pay more and because they churn less. Understanding LTV by segment helps allocate sales and marketing resources to the most valuable opportunities.

Every recovered failed payment extends a customer's lifetime and directly increases LTV. If LostChurn recovers a $200/month subscriber who would have churned involuntarily and that customer stays for 6 more months, that recovery is worth $1,200 in realized LTV — far more than just the single recovered payment.