What is LTV?
Lifetime Value
TL;DR
LTV (Lifetime Value) is the total revenue you can expect from a single customer over their entire relationship with your business.
Example
A subscription service with these numbers:
- Average monthly payment: 500 kr
- Average customer stays: 24 months
- LTV = 500 × 24 = 12,000 kr
An e-commerce store:
- Average order value: 800 kr
- Average orders per year: 3
- Average customer lifespan: 4 years
- LTV = 800 × 3 × 4 = 9,600 kr
Different customer segments have different LTVs:
| Segment | Monthly Spend | Lifespan | LTV |
|---|---|---|---|
| Basic users | 200 kr | 12 months | 2,400 kr |
| Pro users | 500 kr | 30 months | 15,000 kr |
| Enterprise | 5,000 kr | 48 months | 240,000 kr |
This is why enterprise customers get dedicated sales reps.
Explanation
How to Calculate LTV
Simple formula: Average Revenue per Customer × Average Customer Lifespan
More accurate formula (subscription): Average Monthly Revenue ÷ Monthly Churn Rate
Example: 500 kr/month ÷ 5% churn = 10,000 kr LTV
Including profit margins: LTV × Gross Margin = LTV after costs
If LTV is 12,000 kr but gross margin is 70%, your true LTV is 8,400 kr.
Improving LTV
There are three levers:
- Increase revenue per customer: Upsell, cross-sell, raise prices
- Extend customer lifespan: Reduce churn, improve product
- Increase purchase frequency: For non-subscription businesses
Each of these can be improved independently.
Why It Matters
For Business Owners
LTV tells you what a customer is worth. Without knowing this, you're flying blind on marketing spend, sales investments, and customer service resources.
The LTV:CAC ratio determines viability. The golden rule is LTV should be at least 3x CAC. Below 3:1, you may struggle to be profitable. Above 5:1, you might be under-investing in growth.
LTV guides resource allocation. High-LTV customers deserve more attention, better support, and dedicated account management. Low-LTV customers might be better served with self-service.
LTV varies by acquisition channel. Customers from referrals often have higher LTV than those from paid ads. Track LTV by source to optimize marketing.
Common Mistakes
- Overestimating customer lifespan (be conservative)
- Ignoring customer acquisition costs
- Not segmenting LTV by customer type
- Using revenue instead of profit margin
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