What Is Lifetime Value?
Lifetime value (LTV) is the total gross profit a business expects to earn from a customer over the whole time they keep buying.
How it works
A simple version for subscriptions: LTV equals average monthly revenue per customer, times gross margin, divided by monthly churn rate. Churn is the share of customers who leave each month, so one divided by churn is the average customer lifespan in months. Using gross margin makes it a profit measure, not just revenue.
It is an estimate built on assumptions about how long customers stay. Early on you have little data, so treat it as a range, not a fact.
Example
For example, customers pay $50 a month, gross margin is 80 percent and 5 percent of customers leave each month. Gross profit per month is $40. Average lifespan is one divided by 0.05, or 20 months. LTV is $40 times 20, or $800. If customer acquisition cost is $200, the ratio of LTV to CAC is 4 to 1.
Why founders care
LTV sets a ceiling on what you can pay to win a customer. Compared with CAC, it shows whether growth is profitable. It also shows why retention matters: lowering churn from 5 percent to 4 percent raises lifespan from 20 to 25 months in the example above.
Common mistakes
- Using revenue instead of gross profit.
- Assuming customers stay forever when you only have a few months of data.
- Ignoring that churn is often higher in the first months.
Frequently asked questions
What is a good LTV to CAC ratio?
Many founders use rules of thumb such as at least 3 to 1, but norms vary by business model and cash position. Payback time matters as much as the ratio.
How do I calculate LTV with little data?
Use the simple formula with your best current churn and margin, label it an estimate, and update it each month as real data arrives. A range is more honest than one number.
Related terms
Go deeper
- Startup Metrics That Matter: MRR, Churn, CAC and LTV GuideStartup metrics explained in plain English: MRR, ARR, churn, CAC, LTV and more, with formulas in words, worked examples, and what investors ask for.
- How to Find Product Market Fit: Signs and Tests GuideHow to find product market fit and know when you have it: signs to watch, a simple survey, how long it takes, and what to do if the signs are not there yet.
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.