What is Customer Lifetime Value (LTV)?
Short Answer
LTV is the total profit a company expects to generate from a customer relationship over its lifetime — calculated as (ARPU × Contribution Margin) / Monthly Churn.
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.
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