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Intermediate

What is LTV

Full name: Customer Lifetime Value

Also known as: customer lifetime value, lifetime value, CLV, CLTV, how to calculate LTV, LTV formula

Definition

LTV (customer lifetime value) is the gross profit one customer brings over the whole relationship. You compare it with the cost of winning that customer (CAC).

Why it matters

LTV sets a ceiling on what you can spend to win a customer, and the comparison with that cost is the LTV:CAC ratio.

Common mistakes

Mixing definitions on one page: revenue in one place, gross profit in another, net profit in a third.

Related terms

Worked exampleIllustration

What one gym member is worth

Member card

  • Pays each month₪400
  • Left after direct costs, 50%₪200 a month
  • Stays on average, 1 ÷ 15% monthly churn6.7 months
  • Lifetime value of the member₪1,333

Steps

  1. The monthly fee, the average revenue per member (ARPU).₪400

  2. Gross margin is 50%, so each member contributes 400 × 50% a month.₪200

  3. Monthly churn is 15%, so the average member stays 1 ÷ 0.15 months.about 6.7

  4. LTV = 400 × 50% ÷ 15%.about ₪1,333

  5. If churn falls to 10%, the average stay is 10 months and LTV = 200 ÷ 0.10.₪2,000

How much of the ₪1,333 may go on winning a new member is what the LTV:CAC page answers.

Illustration

A member's value adds up, then flattens

₪400 a month × 50% gross margin = ₪200 a month. At 15% monthly churn the average member stays 6.7 months, so the LTV is about ₪1,333.LTV ₪1,333Average stay: 6.7 months161218243036Months as a member

₪400 a month × 50% gross margin = ₪200 a month. At 15% monthly churn the average member stays 6.7 months, so the LTV is about ₪1,333.

The gym member's gross profit, month by month. Churn makes each later month count a little less, so the curve flattens at the lifetime value in gold.

Definition

LTV, short for customer lifetime value and also written CLV or CLTV, is the gross profit one customer brings the business over the whole time they stay: what they pay, minus the direct cost of serving them. The formula common on SaaS metrics sites is average monthly revenue per customer (ARPU) times gross margin, divided by monthly churn. ARPU and churn must cover the same period, and the formula assumes churn stays roughly constant. It works because 1 divided by churn is the average lifetime: at 15% a month, the average customer stays about 6.7 months. Without subscriptions, ecommerce analytics tools use average order value times purchases per year times years as a customer times gross margin. Some teams compute LTV on revenue, which overstates the value. Historical LTV adds up what past customers actually brought, predictive LTV estimates what current customers will bring.

Why it matters

It also shows what retention is worth: in the formula, halving churn doubles LTV. An average LTV can mislead, because a few large customers pull it up, so compute it by channel or by the month customers joined.

Directly related: CAC, Gross margin, Cash flow.

Formula

LTV = Average Revenue Per User * Gross Margin Percentage / Churn Rate

Improvement tips

  • Compute LTV on gross profit, not on revenue.
  • Split LTV by acquisition channel and by the month customers joined, to see which groups are really worth the most.
  • Raise LTV where it moves most: keep customers longer, and offer upgrades that fit what they already buy.
  • Update LTV when prices, costs or churn change, instead of reusing a number from years ago.

Common mistakes

  • Using monthly ARPU with annual churn, or the reverse.
  • Trusting one average LTV when a few large customers pull it up.
  • Assuming churn stays the same forever, despite seasons and new competitors.

Related terms

MarketingIntermediate

CAC

CAC (customer acquisition cost) is what you spend on marketing and sales to win one new customer: a period's spend divided by the new customers it brought.

FinanceBeginner

Gross margin

Gross margin is the share of revenue left after the cost of goods sold: (revenue - COGS) ÷ revenue × 100. At 60%, 60 agorot of each shekel remain.

FinanceBeginner

Cash flow

Cash flow is the money coming into and going out of a business's account in a period. A profitable business can still run short of cash when customers pay late.

ProductIntermediate

Retention

Retention is the share of customers who keep buying or using your product over a set period, counting only those you already had at the start.

FinanceBeginner

Net Profit

Net profit is what a business keeps from revenue after every expense, cost of sales, running costs, interest and tax. It is the bottom line, not cash.

FinanceAdvanced

LTV:CAC

LTV:CAC is the ratio of the gross profit a customer brings over the relationship (LTV) to what it cost to win them (CAC). 3:1 is a common SaaS rule of thumb.

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Quick check

Why should LTV be calculated on gross profit rather than on revenue?

Choose an answer

Frequently asked questions

Do I need to understand LTV before starting a business?
Yes. It makes you think past the first sale: how long a customer stays and what they leave you after direct costs. That decides how much you can spend to win them.
When does LTV first become relevant for a new business?
When you set prices and plan marketing. Even a rough estimate tells you whether paid acquisition can pay for itself.
How can I estimate LTV before I have customers?
Take the planned monthly price and your expected gross margin, and try a few churn rates. Treat the result as a range, and replace it with real numbers once customers have stayed a few months.
Is LTV relevant for a business that sells one off products?
Yes, if customers come back. Multiply average order value by purchases per year, by years as a customer and by gross margin. If customers never return, LTV is simply the gross profit of one sale.
Why does LTV matter for a business already running?
It shows which channels and customer groups are worth the most over time, so marketing money goes where it comes back.
What goes wrong when a business ignores LTV?
It can pay more to win customers than they ever bring in gross profit, and growing sales hide the problem until the cash runs short.
How do I start tracking LTV without stopping day to day work?
Once a quarter, take three numbers from your records: average monthly revenue per customer, gross margin and monthly churn. Multiply the first two and divide by the third. A spreadsheet is enough.
How can I increase customer LTV when sales are flat?
Keep customers longer with a better first month, a quick response when they are unhappy, and upgrades that fit what they already buy. In the formula, halving churn doubles LTV.
What does LTV mean in plain words?
It is what one customer leaves you over the whole relationship, after the direct cost of serving them. A gym member who pays ₪400 a month, costs ₪200 a month to serve and stays 6.7 months on average is worth about ₪1,333.
Is calculating LTV complicated or risky?
The calculation is simple. The risk is in the inputs: an optimistic churn rate, or revenue used instead of gross profit, inflates LTV and invites overspending on acquisition.
Do I need an accountant or special software to calculate LTV?
No. Sales records, your gross margin and a spreadsheet are enough. Your accountant can help you confirm the gross margin.
Should I calculate LTV on revenue or on profit?
On gross profit. Revenue overstates what a customer is worth, and net profit mixes in overhead that does not depend on any one customer.

Sources: ChartMogul, Customer Lifetime Value (LTV), chartmogul.com, read September 2026

Last reviewed: 2026-09-23

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