Customer Lifetime Value (LTV): Formula and the LTV:CAC Ratio
Customer lifetime value (LTV, also CLV) is the total gross profit you expect to earn from an average customer over the whole time they stay with you. Compared with customer acquisition cost, it tells you whether winning customers is profitable.
By Javier Alonso, Founder & CEO. Updated .
Formulas
- LTV (subscriptions)
- Average revenue per customer per month × Gross margin ÷ Monthly churn rate
- LTV (purchases)
- Average order value × Purchases per year × Years as a customer × Gross margin
- LTV:CAC ratio
- LTV ÷ CAC
Worked example
A subscription product earns $50 per customer per month at an 80% gross margin, and 4% of customers cancel each month.
LTV = $50 × 0.8 ÷ 0.04 = $1,000.
With a CAC of $200, the LTV:CAC ratio is $1,000 ÷ $200 = 5:1.
Dividing by churn works because a 4% monthly churn implies an average customer lifetime of about 25 months (1 ÷ 0.04).
The LTV:CAC ratio
The ratio compares what a customer is worth with what it cost to win them. A widely quoted guide for subscription businesses is about 3:1 or higher. Below 1:1, every new customer loses money. Very high ratios, such as 8:1, can mean you are under-investing in growth.
Treat these as rules of thumb, and check payback time too. A 5:1 ratio that takes four years to recover is risky for a startup with limited cash.
Revenue LTV vs gross-margin LTV
Some people calculate LTV with revenue instead of gross profit. That inflates the number, especially for businesses with high delivery costs, such as marketplaces, hardware or services. Use gross margin whenever you compare LTV with CAC.
LTV at the early stage
Young startups do not have enough history to know true lifetime, so early LTV figures rest on assumptions. Show the inputs (price, margin, churn) separately, update them as cohorts mature and avoid presenting a precise LTV from two months of data.
For your role
- Investors
- Ask for the churn rate and margin behind the LTV. A large LTV built on a guessed churn rate tells you little.
- Accelerators & incubators
- Teaching teams to show the inputs rather than the final LTV figure leads to more honest reporting.
Primary sources
- SaaS Metrics 2.0 — David Skok, For Entrepreneurs
- 16 Startup Metrics — Andreessen Horowitz
Common questions
- What does LTV stand for?
- LTV stands for lifetime value, or customer lifetime value (CLV): the gross profit you expect from an average customer over the whole relationship.
- What is a good LTV:CAC ratio?
- A common guide for subscription businesses is around 3:1 or higher, together with a payback period of less than a year.
- How do you calculate LTV for a subscription business?
- Multiply average monthly revenue per customer by gross margin, then divide by the monthly churn rate.
Put it into practice
Traction Engine tracks retention alongside your weekly distribution experiments.