Definition
Lifetime Value (LTV)
LTV is the total profit a company expects to earn from a customer over the entire duration of the relationship.
Customer lifetime value estimates how much a customer is worth across all their purchases, accounting for the gross margin and how long they stay before churning. A subscription business computes it from average revenue per user, margin and the inverse of the churn rate.
LTV is compared with CAC to judge whether acquiring customers is profitable. If a customer's LTV far exceeds the cost to acquire them, growth spending creates value; if not, the business is buying unprofitable customers.
Related terms
- Customer Acquisition Cost (CAC)CAC is the average cost a company incurs to acquire one new customer, including marketing and sales spend.
- LTV/CAC RatioThe LTV/CAC ratio compares the lifetime value of a customer to the cost of acquiring them, gauging the efficiency of growth spending.
- Churn RateChurn rate is the percentage of customers or revenue a company loses over a given period.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.