LTV is not an accounting curiosity: it is the number that decides how much you are allowed to spend to win a customer. Without it, every advertising decision is a bet.
It also has a reputation for being complicated, which is false. What is complicated is calculating it honestly.
Definition
LTV, lifetime value, is the total revenue a customer generates across the whole of their commercial relationship with you.
The base formula for a subscription fits on one line:
LTV = average monthly revenue per customer ÷ monthly Churn rate rate
A customer at €40 a month with 5 percent churn: 40 ÷ 0.05 = €800 of LTV.
Dividing by churn surprises people at first. It simply expresses average lifetime: at 5 percent churn a customer stays twenty months on average.
Three corrections that change everything
Reason in margin, not revenue
This is the most important correction and the most often skipped. A customer paying €40 who costs you €12 in hosting, Payment processor fees and support is not worth €800 but €560. Use your Gross margin, or you overstate your available acquisition budget by a third or more.
Do not project to infinity
The formula assumes constant churn forever, which does not exist. Prudent practice caps it at twenty-four or thirty-six months. A smaller reliable number beats a large unverifiable one.
Segment it
A global LTV mixes customers with nothing in common. Calculate it per acquisition channel: customers from Organic traffic often stay far longer than those from a promotion, and that difference should steer your spending.
What it is actually for
| Decision | What LTV contributes |
|---|---|
| Advertising budget | The acceptable CAC (customer acquisition cost) ceiling |
| Annual discount | How much you can give without losing |
| Retention effort | What one extra month of life is worth |
| Segment choice | Which customer type deserves the effort |
Frequently asked questions
How do I calculate LTV without subscriptions?
Multiply Average order value by the average number of purchases over a customer's life. On a one-off model with no repeat purchase, LTV is simply the margin on the first sale, which makes controlling CAC (customer acquisition cost) all the more critical.
When does the number become reliable?
Never entirely at the start, since it rests on churn you have not yet observed over time. For the first six months treat it as a hypothesis to revise, not as data.
Should referrals be included?
Not inside LTV itself, or you count the same revenue twice. A customer who brings others lowers your average CAC instead, and that is where the effect belongs.
Is a high LTV enough?
No, because it says nothing about timing. An LTV of €800 spread over twenty months does not fund acquisition paid for today. That is exactly what the LTV/CAC ratio and its payback period are about.