Business Glossary
What Is Customer Lifetime Value?
Customer Lifetime Value (LTV) is the total revenue or profit expected from a single customer relationship over its entire duration. It is the essential counterpart to Customer Acquisition Cost — together they determine commercial viability.
The Formula
LTV (revenue) = Average Purchase Value × Purchase Frequency × Customer Lifespan in years
Worked Example — UK SME
A UK accountancy firm: average client £2,400/year, stays 6.5 years. Revenue LTV = £15,600. At 65% gross margin, profit LTV = £10,140. CAC = £800. LTV:CAC = 12.7x — excellent.
UK Benchmark
📊 LTV:CAC should be 3x or above. Below 1x means destroying value with every customer acquired. Extending average customer lifespan by 20% improves LTV by the same percentage — making retention investment highly valuable.
Common Questions
Should I calculate revenue or profit LTV?
Always use gross profit LTV for strategic decisions. Revenue LTV looks impressive but doesn’t account for the cost of serving the customer.
How do I increase customer lifetime value?
Three levers: extend retention (reduce churn), increase purchase frequency, increase average order value. Retention is usually the highest-value lever.
How do I calculate churn rate?
Monthly churn = customers lost in month ÷ customers at start. Average lifespan = 1 ÷ monthly churn rate. Reducing churn from 3% to 2% extends lifespan from 33 to 50 months.
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