Customer Lifetime Value
Predicted total revenue a single customer will generate over their relationship with a business.
Formula
Variables
Example
ARPU = $50/month, churn = 5 %/month → LTV = $1 000
How it works
Customer Lifetime Value estimates how much revenue an average customer will produce before they stop buying. The idea is that if a customer spends a steady amount each period and there is a fixed chance they leave each period, then the average relationship length is about the inverse of the churn rate. Multiplying ARPU by that expected duration gives a simple estimate of total revenue from one customer.
When to use it
Use this when you need a quick estimate of how valuable a customer is over time, especially in subscription businesses, memberships, or any model with recurring purchases. It is useful for comparing acquisition costs, setting marketing budgets, and deciding whether retaining customers is profitable.
Worked example, step by step
Step 1: ARPU = $30 per month Step 2: Churn rate = 2% per month = 0.02 Step 3: LTV = ARPU × (1 / churn rate) Step 4: LTV = 30 × (1 / 0.02) Step 5: LTV = 30 × 50 = $1,500 Final answer: The estimated customer lifetime value is $1,500.
Common mistakes to avoid
- Using churn rate as 2 instead of 0.02 in the formula
- Mixing time periods, such as using monthly ARPU with yearly churn
- Treating LTV as profit instead of revenue without subtracting costs
Did You Know?
A healthy business typically has an LTV:CAC ratio of 3:1 or higher.
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