What Is Customer Lifetime Value (LTV)?
The total revenue a business expects from a single customer over the entire duration of their relationship.
Customer Lifetime Value (LTV) Explained
Customer lifetime value predicts how much revenue one customer will generate before they stop doing business with you. It combines purchase frequency, average order value, and customer lifespan into a single number.
LTV is most powerful when compared to customer acquisition cost (CAC). The standard benchmark is a 3:1 ratio: for every dollar spent acquiring a customer, you should earn at least three dollars over their lifetime. Below 3:1, growth is unsustainable. Above 5:1, you are likely underinvesting in growth.
Calculating LTV requires clean data on customer retention, purchase patterns, and gross margins. For subscription businesses, the formula is straightforward. For transactional businesses, it requires more analysis of repeat purchase behavior.
Improving LTV is often more profitable than reducing CAC. Increasing retention by 5% can increase profits by 25 to 95% (Bain & Company). That is why customer success, upselling, and retention programs have become standard growth investments.
Why Customer Lifetime Value (LTV) Matters
LTV determines how much you can afford to spend acquiring customers. Without it, you are guessing. Companies with high LTV can outspend competitors on acquisition and still be profitable. It is the single most important metric for long-term business health.
How to Calculate Customer Lifetime Value (LTV)
LTV = Average Purchase Value x Purchase Frequency x Average Customer LifespanCommon Mistakes
- 1
Using revenue instead of gross margin in the calculation, which overstates the value
- 2
Not accounting for churn rate, which makes LTV projections unrealistically high
- 3
Treating all customers as having the same LTV instead of segmenting by cohort or channel
Related Terms
Customer Acquisition Cost (CAC)
The total cost to acquire one new customer, calculated by dividing all sales and marketing spend by the number of new customers acquired.
Churn Rate
The percentage of customers who stop using your product or service over a given period, indicating retention health and product satisfaction.
Net Revenue Retention (NRR)
The percentage of recurring revenue retained from existing customers over a period, including expansions and contracting, excluding new customers.
Same-Store Sales Growth
Revenue growth at existing locations compared to the same period last year, isolating organic growth from growth driven by opening new locations.
How Attainment Helps
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Frequently Asked Questions
What is a good LTV to CAC ratio?
3:1 is the standard benchmark. Below 3:1 means you are spending too much to acquire customers relative to their value. Above 5:1 may mean you are underinvesting in growth and leaving market share on the table.
How do you increase customer lifetime value?
Three levers: increase average purchase value (upselling, cross-selling), increase purchase frequency (loyalty programs, re-engagement), and increase customer lifespan (reduce churn through better experience and support).
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