marketing
LTV (Customer Lifetime Value)
Total gross profit you can expect from a customer over their full relationship with you.
Definition
LTV is the gross profit earned from a customer across their full lifetime. Standard formula: (avg revenue per customer per period) x (gross margin) x (avg customer lifespan). For service businesses, often annualized: $5K/year x 70% margin x 4 years = $14K LTV. LTV varies dramatically by segment: enterprise customers might have 5-10x the LTV of SMB customers, which justifies very different acquisition costs. Always use gross profit (not revenue) in the LTV calc, otherwise CAC comparisons mislead.
In your business
- →Segment LTV by acquisition channel - some channels acquire higher-LTV customers
- →Use gross profit, not revenue, in the LTV calculation
- →Don't just chase low CAC; chase high LTV