Glossary · Finance
What is Customer Lifetime Value (LTV)?
Definition
Customer lifetime value (LTV) is the total gross profit a typical customer is expected to generate for your business over the entire time they buy from you.
LTV = average monthly revenue per customer × gross margin % × average customer lifespan (months)
Why it matters
LTV helps you decide how much you can afford to spend to win a customer and shows why retention is so powerful. Repeat buyers are usually the most profitable ones.
A subscription coffee business charges $30 a month with a 50 percent gross margin, so each month yields $15. Customers stay about 12 months on average. LTV is $15 times 12, or $180. If a customer costs $60 to acquire, you earn $120 net over their lifetime.
For businesses without subscriptions, use average order value times purchase frequency times years as a customer, then apply gross margin. Treat early estimates as rough until you have real history.
Common mistakes
- !Using revenue instead of gross profit, which overstates what a customer is worth.
- !Guessing lifespan optimistically before enough customers have actually churned.
Frequently asked questions
What is Customer Lifetime Value (LTV)?
Customer lifetime value (LTV) is the total gross profit a typical customer is expected to generate for your business over the entire time they buy from you.
How do you calculate LTV?
LTV = average monthly revenue per customer × gross margin % × average customer lifespan (months)
What mistakes do beginners make with LTV?
Using revenue instead of gross profit, which overstates what a customer is worth. Guessing lifespan optimistically before enough customers have actually churned.
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