Customer Lifetime Value (LTV)
Definition
Customer Lifetime Value (LTV) is a prediction of the total revenue a business can expect from a single customer account throughout the entire business relationship.
Explanation
LTV helps businesses understand the long-term value of acquiring and retaining customers. It is calculated by multiplying the average purchase value by the average purchase frequency and the average customer lifespan. For subscription businesses, LTV is often calculated as ARPU divided by churn rate.
LTV is most useful when compared to Customer Acquisition Cost (CAC). A healthy LTV:CAC ratio is typically 3:1 or higher, meaning the customer generates three times more value than it costs to acquire them.
Example
A subscription service with average monthly revenue of $50 per customer and an average customer lifespan of 24 months has an LTV of $1,200.