What is Customer Lifetime Value (LTV)?

Full Explanation

The simple formula for LTV is: LTV = (Annual Revenue per Customer × Contribution Margin %) / Annual Churn Rate. For example, if a customer generates £10K annually, the contribution margin is 70% (excluding CAC), and annual churn is 20%, then LTV = (£10K × 0.7) / 0.2 = £35K. This means the company expects £35K in profit from that customer relationship before CAC. LTV drives whether a business is viable: if CAC is £8K and LTV is £35K, the ratio is 4.4:1, which is healthy (typically 3:1 or better is acceptable). If LTV is only £12K, a £8K CAC is too high and the unit economics do not work. LTV is also used to determine payback period: if CAC is £8K and monthly contribution margin is £583, payback = £8K / £583 ≈ 14 months. Fast payback (under 12 months) frees up capital for re-investment; slow payback (over 24 months) ties up capital and is seen as high-risk. Improving LTV is often more impactful than reducing CAC — small improvements in churn or price can have outsized effects on LTV. The transition from founder-led sales to scalable growth requires a shift in which metrics matter most. Early-stage companies focus on product-market fit indicators: activation rate, engagement frequency, and qualitative feedback. Growth-stage companies shift attention to efficiency metrics: customer acquisition cost relative to lifetime value, payback period, and gross margin. Late-stage companies preparing for exit must demonstrate both efficiency and predictability through metrics like net revenue retention, gross revenue retention, and logo churn. Each stage demands different measurement frameworks, and the intangible assets being built at each stage differ accordingly.

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