Example: With an ARPU of $100 a month, a 70% gross margin and a 4% monthly churn rate, LTV = $100 × 0.70 ÷ 0.04 = $1,750.
Why Customer Lifetime Value (LTV) matters
LTV tells you how much you can afford to spend to win a customer. If a customer is worth $1,750 over their lifetime, spending $200 to acquire them is very different from spending $2,000.
It also links your marketing and your retention. Lowering churn or raising ARPU both lift LTV, which gives you room to compete harder for new customers.
How to read it
Compare LTV with the cost of acquiring a customer (CPA). A widely used rule of thumb is that LTV should be at least around three times CPA, but this is a guideline, not a law, and it depends on how fast you recover your costs.
The simple formula above is an estimate that assumes steady churn and revenue. For young businesses with little history it can be very unreliable, so treat it as a rough guide.
How to improve it
- Reduce churn by improving onboarding and customer support.
- Raise ARPU through upgrades, add-ons and better pricing.
- Improve gross margin by lowering the cost of serving each customer.
- Focus acquisition on the segments with the highest LTV, not the cheapest signups.
Common mistakes
- Using revenue instead of gross margin and overstating what a customer is worth.
- Using a churn rate from a short, unusual period.
- Treating the estimate as precise for a very new business.
- Comparing LTV with CPA without considering how long it takes to earn the cost back.
“What is my estimated customer lifetime value by plan, and how does it compare with my cost per acquisition?”
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