Customer Lifetime Value

What Customer Lifetime Value means in practice

LTV sets the ceiling on what you can afford to spend winning a customer. Because it is a projection rather than a measurement, it is unusually easy to inflate — and inflated LTV is what makes unsustainable acquisition look affordable on a spreadsheet.

Two decisions determine whether an LTV figure is honest. First, use gross margin rather than revenue: a customer paying £100 a month who costs £40 to serve contributes £60, and using the £100 overstates value by nearly double. Second, use an observed churn rate rather than a hoped-for one, because LTV is extraordinarily sensitive to churn — the difference between 3% and 6% monthly churn halves the result.

Early-stage LTV is always an estimate built on very short history. A company with eight months of data cannot know its true retention curve, so the sensible approach is to model conservatively and treat LTV as a planning bound rather than a fact.

How it is calculated

Worked example

A subscription product charging £100 per month.

• Average revenue per customer: £100/month.
• Gross margin: 80% → £80 of monthly contribution.
• Observed monthly churn: 4% → average customer lifetime of 25 months.
• LTV = £80 ÷ 0.04 = £2,000.

Takeaway: Using revenue instead of margin would have produced £2,500, and assuming 2% churn would have produced £4,000 — the same business made to look twice as valuable by two optimistic inputs.

Common mistakes

• Using revenue instead of gross margin, which overstates LTV by the whole cost of serving the customer.
• Applying an aspirational churn rate. LTV is more sensitive to churn than to any other input.
• Projecting lifetimes far beyond your actual data history.
• Ignoring that different segments have very different retention, and averaging them into one misleading figure.

Related tool: LTV calculator.

Related terms

• Customer Acquisition Cost — Customer acquisition cost (CAC) is the total sales and marketing spend required to win one new paying customer, calculated by dividing all acquisition costs in a period by the number of customers acquired in that period.
• LTV:CAC Ratio — The LTV:CAC ratio compares the lifetime gross profit of a customer to the cost of acquiring them, showing how many times over each customer repays their acquisition cost. Around 3:1 is the common health benchmark.
• Churn Rate — Churn rate is the percentage of customers (or revenue) lost over a given period. It determines how much new business you must win simply to stand still.
• Gross Margin — Gross margin is the percentage of revenue left after the direct costs of delivering your product or service, before overheads like salaries, marketing and rent.