Glossary
What Is Customer Lifetime Value (LTV)?
Updated · Team Fonda
Short answer
Customer lifetime value (LTV or CLV) is the total gross profit you expect from one customer over the whole time they keep buying from you. A simple version multiplies average monthly revenue per customer by your gross margin and by the number of months a typical customer stays.
Key takeaways
- LTV = monthly revenue per customer x gross margin x months a customer stays.
- For a subscription, months a customer stays = 1 / monthly churn rate.
- Use gross profit, not revenue, or the figure will flatter you.
- LTV sets the ceiling on what you can afford to spend to win a customer.
What customer lifetime value means in plain words
A customer is rarely worth one sale. A subscriber pays every month, and a cafe regular comes back every week. Lifetime value adds up what is left from all of those payments after the direct cost of serving them.
You will see it written as LTV, CLV or CLTV. They mean the same thing. It is always an estimate, because it depends on how long future customers will stay.
How to calculate LTV
Formula
LTV = average monthly revenue per customer x gross margin % x average customer lifetime in months. For subscriptions, average customer lifetime in months = 1 / monthly churn rate.
- Average monthly revenue per customer: total monthly revenue divided by the number of paying customers.
- [Gross margin](/resources/glossary/gross-margin): the share of revenue left after the direct costs of delivering the product, such as ingredients, hosting or payment fees.
- Customer lifetime: how many months a typical customer keeps paying. Your churn rate is the share of customers who cancel each month.
For a business without subscriptions, use average order value x orders per year x years a customer keeps buying x gross margin. The LTV calculator handles the arithmetic.
A worked example
The numbers here are invented. Say you run a language-learning app that charges $30 a month. Hosting, tutor time and payment fees take 20% of revenue, so gross margin is 80%. Each month, 5% of subscribers cancel.
| Step | Calculation | Result |
|---|---|---|
| Customer lifetime | 1 / 0.05 | 20 months |
| Gross profit per month | $30 x 0.80 | $24 |
| LTV | $24 x 20 | $480 |
If it costs you $120 to win a subscriber, LTV is four times your customer acquisition cost. Now see how sensitive that is. If churn rises to 10% a month, lifetime falls to 10 months and LTV halves to $240, with no change in price. Keeping customers longer often does more for LTV than charging more.
Why it matters and when you meet it
LTV answers a practical question: how much can you spend to get a customer and still make money? Investors look at the ratio of LTV to CAC as a quick test of whether a business can grow profitably, and they want lifetime value to be several times the cost of acquisition. Together the two numbers make up your unit economics, the profit or loss on a single customer, which you can test in the unit economics calculator.
You meet LTV when you set prices and write the financial part of a plan, and again when you prepare to raise money. Before launch you have no churn data, so state your guess and the reason for it. Once you have a few months of customers, replace the guess with what happened. In Fonda, this sits in the Scale phase under Key metrics, after your business plan and launch.
Common mistakes
- Using revenue. Leaving out gross margin overstates what a customer is worth.
- Trusting early churn. A few months of data from your first fans rarely predicts how later customers behave.
- Projecting too far. If the formula says a customer stays eight years and your company is one year old, cap the lifetime at something you could defend.
- One average for everyone. Customers on different plans or from different channels can have very different values. Split them.
- Forgetting timing. LTV arrives over months, while acquisition cost is paid up front. A high LTV does not help if you run out of cash first.
Related terms
- Monthly recurring revenue: the subscription income you can expect each month.
- Churn rate: the share of customers who leave in a period.
- Pricing strategy: how you set prices, which feeds straight into LTV.
Frequently asked questions
Is LTV the same as CLV?
Yes. LTV, CLV and CLTV are all short for customer lifetime value. Some companies calculate it from revenue and others from gross profit, so check which one a figure uses before you compare.
What is a good LTV to CAC ratio?
The ratio needs to be well above one, because a customer has to return more than they cost to win and still leave money for your other costs. What counts as healthy depends on your margins and how fast you earn the cost back.
How do you increase customer lifetime value?
Keep customers longer by fixing the reasons they leave, raise prices where the value supports it, sell add-ons or higher plans, and reduce the direct cost of serving each customer.
How do you estimate LTV with no customers yet?
Use your planned price, an estimate of gross margin from your cost list and a cautious guess at how long customers stay. Label it as an assumption and update it as soon as you have real data.