What is Lifetime Value?
Definition
The total revenue a business expects to earn from a single customer account over the entire duration of their subscription relationship.
Understanding Lifetime Value
Customer Lifetime Value (LTV or CLV) predicts the total revenue a customer will generate. It is calculated as Average Revenue Per User (ARPU) divided by Churn Rate. For example, if a customer pays $20/month and the monthly churn rate is 5%, the LTV is $20/0.05 = $400.
LTV is crucial for determining how much a business can spend on customer acquisition. A healthy business has an LTV at least 3x the Customer Acquisition Cost (CAC). For consumers, understanding LTV helps realize the true long-term cost of subscriptions.
Related Terms
Churn Rate
The percentage of subscribers who cancel their subscription during a given time period, typically measured monthly or annually.
MRR
Monthly Recurring Revenue — the predictable total revenue a subscription business expects to earn each month from all active subscriptions.
Customer Acquisition Cost
The total cost of sales and marketing efforts required to acquire a new paying subscriber, calculated as total acquisition spend divided by new customers gained.
ARPU
Average Revenue Per User — the average monthly or annual revenue generated per subscriber, calculated by dividing total revenue by total subscribers.