What Is Lifetime Value (LTV)?
Lifetime value, sometimes written CLV or CLTV for customer lifetime value, projects the cumulative profit a single customer will generate before leaving. The key word is profit: a rigorous LTV is built on gross profit rather than revenue, because servicing the customer consumes hosting, support, and delivery costs along the way. Quoting LTV on revenue inflates the figure and is a common red flag in company-prepared materials.
LTV only becomes meaningful in comparison. A $20,000 LTV is excellent if customers cost $4,000 to acquire and disastrous if they cost $25,000. That is why the metric almost always appears alongside customer acquisition cost, with the LTV/CAC ratio serving as shorthand for whether the underlying business model works.
How to Calculate LTV
The standard subscription formula is LTV = average revenue per account × gross margin % ÷ churn rate. The 1 ÷ churn term represents expected customer lifetime, so the formula is simply monthly gross profit multiplied by expected months of tenure. More sophisticated versions discount future profit to present value or model retention curves by cohort rather than assuming a flat churn rate.
Take an account paying $500 per month at an 80% gross margin with 2% monthly churn. Monthly gross profit is $400, expected lifetime is 50 months, and LTV is $20,000. If acquiring that account costs $5,000, the LTV/CAC ratio is 4.0x, comfortably above the common 3.0x benchmark that investors use as a floor for a fundable model.
Why LTV Matters and Where It Breaks
LTV is extraordinarily sensitive to its churn assumption. Moving monthly churn from 2% to 1% doubles the calculated LTV, so a company can flatter its unit economics simply by measuring retention over a favorable window or excluding weak cohorts. The simple formula also ignores discounting, treating a dollar of gross profit in year five as equal to one earned next month.
For candidates recruiting into venture capital, growth equity, or consumer-focused banking, LTV questions are near-certain interview material. Strong answers define the metric on a gross profit basis, walk through the formula with clean numbers, and volunteer its weaknesses — especially the temptation to justify heavy marketing spend with long-dated, undiscounted profits that may never arrive.
