If CAC tells you what a customer costs, LTV tells you what they're worth. Knowing both is the only way to know whether your business model works. Knowing only one is worse than useless - it's actively misleading.
Definition
LTV (Customer Lifetime Value) - the total gross profit your business expects to earn from a single customer across the full duration of the relationship.
Formula
Subscription business: LTV = (Average revenue per customer per month × Gross margin) ÷ Monthly churn rate Non-subscription: LTV = Average gross profit per purchase × Average number of purchases over customer lifetime
Common uses
- Unit economics - the value half of the LTV:CAC ratio
- Customer segmentation - by-segment LTV identifies which customers are most valuable
- Pricing decisions - LTV impact of pricing changes
- Acquisition budget - how much you can afford to spend acquiring a customer
Watch out
Always use gross profit, not revenue. Revenue-based LTV ignores the cost to serve customers and produces a misleading number.
LTV is an estimate, not a fact. Use conservative inputs. Recalculate quarterly. Look at LTV by cohort - averages hide important trends.
For the full explanation, see What Is Customer Lifetime Value (LTV)?