Lifetime value (LTV): definition, formula, and importance

Definition

At its core, Lifetime Value (LTV) tells you this: How much money will a customer bring into your business over the entire time they remain your customer?

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But that’s just the surface. LTV is like a strategic crystal ball that shows whether your business model is built to last or leak.

In simple terms:

If CAC (customer acquisition cost) is the upfront bet...
LTV is the long-term payoff.

A healthy LTV tells you it’s worth it to acquire, serve, and retain a customer. A poor LTV? You’re burning cash to win short-term love.

LTV formula (for subscription businesses):

LTV=Average Revenue Per User (ARPU) X Gross Margin/Churn Rate

Why LTV matters:

Metric	Why it matters
LTV:CAC ratio	A north star metric. Healthy ratio is 3:1. If it’s 1:1, you’re on a treadmill. If it’s 5:1, you may be under-investing in growth.
Payback period	How fast your CAC is recouped. The shorter the time period, the better the cash efficiency.
Retention strategies	Boosting LTV is often cheaper than boosting CAC.
Valuation driver	Investors look at LTV to assess sustainability and scalability.
Segmentation insights	Different cohorts mean different LTVs. Time to tailor your strategy.

What LTV is not:

It’s not static → Changes with pricing, retention, product usage.
It’s not universal → Varies by cohort, channel, and persona.
It’s not just a spreadsheet formula → It’s a lens to understand your business maturity.

What to investigate if your LTV is low

A low Lifetime Value is often a signal, not just a metric. It points to deeper challenges across your customer lifecycle. Here are some of the common root causes:

High churn: Are customers leaving too early in their journey? If so, your onboarding, product experience, or support model may need improvement.
Underpricing: Are you delivering more value than you capture? Revisit your pricing model to ensure it reflects the ROI customers receive over time.
Poor customer fit: Are you acquiring customers who were never the right match? Misaligned targeting or overpromising during the sales process can lead to short-lived accounts.

In most cases, improving LTV is about strengthening the relationship post-sale. That means doubling down on retention, customer success, and expansion pathways like upsells or renewals.

Pro-level LTV questions

What’s our LTV by persona, plan, or geography?
What’s the projected LTV of customers acquired via paid vs. partner channels?
How does product adoption impact LTV over 6, 12, and 24 months?
Do our champions have a higher LTV than our casual users?

Final takeaway:

LTV cuts through vanity metrics, glitzy growth graphs, and funding hype because at the end of the day, the most valuable customers aren’t the ones you close, they’re the ones you keep.

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