# Customer lifetime value (LTV)

> Customer lifetime value (LTV) is the gross profit a business expects from one customer over the whole time they stay. For a subscription it is usually average revenue per account × gross margin ÷ churn rate.

Canonical: https://abacklaunch.com/glossary/customer-lifetime-value

Also called LTV, CLV, CLTV, lifetime value, customer lifetime value.

## The formula, part by part

LTV = ARPA × gross margin ÷ churn. ARPA is average revenue per account per month: MRR divided by the number of paying customers. Gross margin is the share of revenue left after the cost of serving customers, such as hosting, payment fees and support. Churn is the monthly customer churn rate, written as a decimal.

Dividing by churn is the same as multiplying by the average customer lifetime in months, because an average customer stays about 1 ÷ churn months. Some teams leave out gross margin and calculate a revenue LTV. That gives a bigger number, but it is not the profit you can spend on winning customers.

## Why it is easy to overestimate

Young products have little history, and churn in the first few months is often higher or lower than it will settle at. A churn rate of 1 percent gives an average lifetime of 100 months, more than eight years, which few startups have seen. Cap the lifetime you assume, often at three to five years, and recalculate every quarter as real data comes in.

Calculate LTV for each segment as well as overall. A plan or customer type with low churn and high ARPA can have five times the LTV of another, and that tells you who to aim your marketing at.

## Using LTV

LTV sets how much you can afford to spend to win a customer. Compare it with customer acquisition cost: an LTV to CAC ratio around 3 to 1 is the common rule of thumb for a healthy business. Raising LTV usually means reducing churn, raising prices or adding upgrades that existing customers want.

## Example

A product has $10,000 MRR from 200 customers, so ARPA is $50. Gross margin is 80 percent and monthly churn is 4 percent. LTV is $50 × 0.8 ÷ 0.04 = $1,000, from an average lifetime of 25 months. If it costs $300 to win a customer, the LTV to CAC ratio is $1,000 ÷ $300, about 3.3 to 1.

## Questions

### What is a good LTV to CAC ratio?

About 3 to 1 is the usual target. Much lower and acquisition is too expensive. Much higher can mean you are spending too little on growth.

### Is LTV the same as CLV?

Yes. LTV, CLV and CLTV are all names for customer lifetime value.

## Related

- [Customer acquisition cost (CAC)](https://abacklaunch.com/glossary/customer-acquisition-cost)
- [Churn rate](https://abacklaunch.com/glossary/churn-rate)
- [Monthly recurring revenue (MRR)](https://abacklaunch.com/glossary/mrr)
- [Ideal customer profile (ICP)](https://abacklaunch.com/glossary/ideal-customer-profile)
- [Lifetime deal](https://abacklaunch.com/glossary/lifetime-deal)
- [Startup idea validator](https://abacklaunch.com/tools/startup-validation)
- [Launch checklist](https://abacklaunch.com/tools/launch-checklist)