Lifetime value
Also called: LTV, CLV, CLTV, customer lifetime value
Definition
Lifetime value (LTV) is the total net profit a business expects from a customer over the whole relationship. Compared with customer acquisition cost, it shows how much you can afford to spend to win a customer.
Lifetime value (LTV, also CLV) estimates how much a customer is worth to you from the first purchase to the day they leave. Paired with customer acquisition cost, it is the core of unit economics: if a customer is worth more than they cost to acquire, growth pays for itself.
How it works
a16z defines lifetime value as the present value of the future net profit from a customer over the relationship, and lays out a simple way to calculate it for subscription businesses:
- Revenue per customer per month = average order value x orders per month (for subscriptions, the monthly price).
- Contribution margin per customer per month = revenue minus the variable costs of serving that customer (hosting, support, payment fees, other per-customer costs).
- Average customer lifespan in months = 1 / monthly churn rate.
- LTV = contribution margin per month x lifespan.
Worked example
A SaaS product charges $50 a month. Variable costs per customer are $10 a month, so contribution margin is $40. Monthly churn is 4%, so the average lifespan is 1 / 0.04 = 25 months.
LTV = $40 x 25 = $1,000.
If CAC is $250, each customer returns four times what they cost. If CAC is $1,100, you lose money on every customer, however fast you grow.
a16z flags a common mistake: calculating LTV from revenue or gross margin instead of net contribution. With revenue, the example above would show $1,250, a 25% overstatement. It also suggests that with only a few months of data, the conservative choice is to use actual value to date rather than projecting a long lifespan.
Why it matters for marketers
LTV sets the ceiling on what a channel can cost. It also changes which channels look good. A channel that brings customers who stay twice as long can justify twice the CAC.
That is why LTV is worth measuring per acquisition channel, not just overall. Customers from ads, SEO, referrals and communities often behave differently.
How it plays out on Reddit
Customers who find you through a Reddit thread usually arrived with a specific problem and read other people's experiences first. Whether they retain better or worse than other channels is something to check in your own data, not assume.
How to check:
- Add a "How did you hear about us?" field at signup, since Reddit visits often show up as direct traffic.
- Tag those customers and compare their churn and expansion with other channels after three to six months.
- If Reddit-sourced customers have higher LTV, you can justify more time on Reddit replies or a higher budget for tools and help.
Also watch the reverse: if a reply overpromised, those customers may churn fast. Honest replies attract customers the product actually fits, which is what LTV rewards.
Common mistakes
- Using revenue instead of margin. It inflates LTV and makes expensive channels look affordable.
- Projecting lifespans from too little data. Early churn rates are unstable.
- One LTV for everyone. Segment by plan, customer type and channel.
Frequently asked questions
How do you calculate customer lifetime value?
Multiply monthly contribution margin per customer by the average lifespan in months, where lifespan is 1 divided by monthly churn.
What is the difference between LTV and CLV?
Nothing. LTV, CLV and CLTV all refer to customer lifetime value.
Why compare LTV to CAC?
Because it shows whether acquiring a customer is profitable. If LTV is lower than CAC, every new customer loses money.