Why it matters
Lifetime value sets the ceiling on what winning a customer can cost. Without it, acquisition spend is guesswork. With it, you can compare channels, set a ceiling for what each new customer may cost and decide whether a price change pays for itself.
It is also a sensitivity test for the whole business. Because lifetime is the inverse of churn, a small drop in churn lengthens every customer's life and raises the value of every customer you have already won.
The formula
Multiply the average monthly revenue per customer by your gross margin to get the monthly margin per customer. Then divide by the monthly churn rate. One divided by the churn rate is the expected lifetime in months, so the result is monthly margin times expected months. Churn must be above zero, since zero churn means no end to the lifetime.
LTV = ARPA x gross margin / monthly churn
Lifetime in months = 1 / monthly churnA worked example
A subscription business has the following averages. These numbers are made up for illustration.
| Example numbers | Value |
|---|---|
| ARPA per month | $120 |
| Gross margin | 75% |
| Monthly customer churn | 3.0% |
| Monthly margin per customer | $90 |
| Expected lifetime | 33.3 months |
| Customer lifetime value | $3,000 |
| Lifetime revenue, before margin | $4,000 |
A margin of $90 a month for an expected 33.3 months gives a lifetime value of $3,000. The revenue figure of $4,000 is larger, but it is not what the customer is worth to you, because the cost of serving them is not yours to keep. The chart shows the expected margin building toward the $3,000 ceiling as customers leave.
- Expected margin
- Dollars of margin
How to improve it
Value rises with margin per customer and with the time customers stay, so each of the three inputs is a lever.
- Lower churn first. Because lifetime is one divided by churn, a lower rate has the largest effect on the result.
- Raise ARPA with plans, add-ons and usage pricing that scale with what the customer gets.
- Improve gross margin by reducing the cost of serving a customer, including payment fees and support time.
- Calculate it by segment. An average across very different customers describes none of them.
Common mistakes
- Using revenue instead of gross margin, which overstates value and then flatters the ratio to acquisition cost.
- Mixing a monthly ARPA with an annual churn rate, or the reverse. Both must use the same period.
- Using a very low churn rate from a young cohort. A few good months give a huge lifetime that older customers do not match.
- Applying one blended figure to every channel, when customers from different sources stay for different lengths of time.
- Treating the figure as precise. It is an estimate that assumes churn stays constant, so show it as a range when you can.
Calculate it and read next
Work it out with your own figures in the customer lifetime value calculator. Then read about LTV to CAC ratio, Customer acquisition cost and Customer churn rate.
- LTV to CAC ratio: the lifetime value set against what a customer cost to win.
- Customer acquisition cost: the spend that value has to repay.
- Customer churn rate: the input that sets the lifetime.
Frequently asked questions
Is LTV based on revenue or on margin?
Use gross margin. Revenue ignores the cost of delivering the product, so a figure built on revenue overstates what a customer is worth to you.
What if my churn rate is zero?
Then the formula has no finite answer, since the expected lifetime has no end. Use a longer window to find a realistic rate, or cap the lifetime at a horizon you can defend, such as five years.
Is this customer lifetime value or loan to value?
This page is about customer lifetime value, the subscription metric. Loan to value is a lending ratio and is unrelated.
How accurate is the estimate?
It is a model with a constant churn assumption, so treat it as a guide for decisions rather than a forecast. Recalculate it as your churn history grows.