What is Customer Lifetime Value?
Short answer: Customer lifetime value, or LTV, estimates the contribution a customer is expected to generate over a defined relationship. It should be distinguished from lifetime revenue, which ignores delivery cost, and from realised cohort contribution, which uses observed rather than forecast outcomes.
LTV can be built from transaction-level cash flows, contract renewals or a simplified recurring-revenue model. The economic basis may be gross margin or contribution after support, servicing and other variable costs. Customer churn, revenue expansion, contraction, discounting and acquisition cost require explicit treatment. Acquisition cost is normally kept outside LTV and compared separately. A contractual term does not necessarily equal economic life because customers can renew, cancel, default or change usage. The appropriate method depends on the business model, data history and decision being made.
How it works
Define the customer unit, starting cohort, revenue basis and attributable cost. Measure retention and contribution at consistent maturity points. For a cohort method, forecast or observe monthly contribution for each surviving customer and discount future amounts where timing is material. For a simplified model, use a stable periodic churn assumption only when data supports approximately constant retention. Segment by channel, product or customer type when economics differ. Reconcile revenue and margin inputs to management accounts, show forecast and realised LTV separately, and update estimates as cohorts mature. Test downside cases for weaker retention, lower expansion and higher service cost.
Simplified recurring-revenue LTV = average periodic revenue per customer x contribution margin percentage / periodic customer churn rate
Example
Average monthly recurring revenue per customer is 120. Attributable service and support cost is 36, so monthly contribution is 84 and contribution margin is 70%. If monthly customer churn is 2% and the simplifying assumptions are supportable, LTV is 120 x 70% / 2% = 4,200. If churn rises to 3%, LTV falls to 2,800. A twelve-month contractual cap would instead require summing the expected monthly contribution within that horizon, so the perpetuity-style shortcut would not be appropriate.
Why it matters
Founders and CFOs use LTV to set acquisition limits, prioritise segments and forecast cash contribution. Boards challenge the evidence behind long customer lives. Lenders usually give more weight to contracted cash and payback, but LTV helps explain the durability of the revenue base. Buyers review cohort data and cost allocations before accepting the metric. Sellers can demonstrate customer quality through mature cohorts. Equity investors compare LTV with CAC and capital needs to assess whether growth is economically attractive.
LTV is highly sensitive to small changes in churn, margin and horizon. The simplified churn formula assumes stable behaviour and can imply an unrealistic lifetime when data is immature. Revenue expansion may not persist, while support and retention costs may rise as customers age. LTV is not revenue recognised under IFRS or US GAAP and is not a guaranteed cash flow. Public KPI disclosure and transaction use require consistent definitions, balanced assumptions and clear explanation of changes.