# Customer Lifetime Value

_Also known as: LTV, CLV_

**Category:** Metrics
**URL:** https://skiporship.com/glossary/customer-lifetime-value
**Last updated:** 2026-08-08

## Definition

Customer lifetime value (LTV) is the total gross profit you expect to earn from a single customer across the whole of their relationship with you, before the cost of acquiring them.

## What it 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.

## Formula

```
LTV = (average revenue per customer per month × gross margin %) ÷ monthly churn rate
```

Use gross margin, not revenue, and an observed churn rate. Both shortcuts inflate LTV substantially.

## 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](https://skiporship.com/calculators/ltv)

## Related terms

- [Customer Acquisition Cost](https://skiporship.com/glossary/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](https://skiporship.com/glossary/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](https://skiporship.com/glossary/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](https://skiporship.com/glossary/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.

## FAQ

**How do you calculate customer lifetime value?**

Multiply average monthly revenue per customer by gross margin, then divide by monthly churn rate. The margin and churn inputs matter more than the revenue figure — both are where LTV usually gets inflated.

**Should LTV use revenue or gross margin?**

Gross margin. LTV is meant to represent the profit a customer contributes, so the cost of serving them — hosting, support, payment processing — must come out first.

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