Customer lifetime value (LTV) estimates the total revenue a business can expect from a customer over the full length of the relationship, not just a single transaction. It's used to guide how much a business should reasonably spend to acquire or retain a customer.
How to calculate it
A simple version: average revenue per customer per period, multiplied by average customer lifespan. A business with $500/month average revenue and a typical 3-year retention has a rough LTV of $18,000.
More refined models account for gross margin (not just revenue) and discount future revenue to present value, since a dollar of revenue two years from now is worth less than a dollar today.
Using LTV in decisions
LTV is most useful compared against customer acquisition cost (CAC) — a healthy LTV:CAC ratio (commonly cited around 3:1 or higher) suggests sustainable growth; a ratio near 1:1 suggests the business is barely breaking even on new customers.
LTV also helps prioritize retention investment — a segment with high LTV justifies more proactive account management than a segment with low LTV, even if both have similar churn rates in raw percentage terms.