LTV: what it is, the formula and a worked example

LTV (lifetime value) is how much money a customer brings the company over the whole time they pay.

LTV = monthly margin per customer ÷ monthly churn

Why divide by churn: if 5 customers out of 100 leave each month, the average customer stays 1 ÷ 0.05 = 20 months.

Example. A subscription costs $250 a month. Serving one customer costs $100: servers, support, payment fees. The margin is $150. Churn is 5% a month. LTV = $150 ÷ 0.05 = $3,000.

Common mistakes

• Using revenue instead of margin. Then the example gives $250 ÷ 0.05 = $5,000 — $2,000 more than the customer actually leaves the company.
• Trusting churn from the first months. With 20 customers, one leaving is 5% churn, and two is already 10%. At 10%, LTV halves to $1,500. On small numbers LTV jumps with every accident.
• Forgetting that the formula assumes churn is constant. In reality customers leave more often in the first months, then the rest stay. How to see this — in the entry on cohorts.
• Trusting a huge LTV at low churn. At 1% churn the formula gives $15,000, meaning a customer who pays for more than eight years. It's safer to cap the horizon at three years: no more than $150 × 36 = $5,400.

What to compare it with

With CAC. LTV below CAC means every new customer brings a loss. Three times higher — acquisition pays off with room to spare. In the example above, with a CAC of $400, LTV is 7.5 times higher.

In Runway 200

LTV is shown on the dashboard. It's calculated from the average price, margin and churn over the last six weeks. While there are fewer than five customers or almost nobody leaves, it says "not enough data" instead of a number — for exactly the reason described in the second mistake. LTV appears on screen once the dashboard is upgraded to level three.

Work out LTV on your own numbers — unit economics calculator.

More in the glossary: Burn rate · CAC · Cohort · MRR and ARR · Product-market fit · all terms