LTV (Customer Lifetime Value)
The total revenue a business expects to earn from a customer over their entire relationship.
What You Need to Know
LTV predicts how much profit a customer will generate throughout their time as a customer. It's essential for determining how much you can afford to spend on customer acquisition (CAC).
Simple Formula: LTV = Average Order Value × Number of Purchases × Average Customer Lifespan
Subscription Formula: LTV = Monthly Revenue per Customer × Average Customer Lifetime (months)
Example: Subscription Business
- Monthly subscription: $50
- Average retention: 24 months
- LTV = $50 × 24 = $1,200
LTV vs CAC Ratio: The golden rule of sustainable growth.
Ideal Ratio: 3:1 (LTV:CAC)
- Spend $1 to acquire customer
- Earn $3 in lifetime value
- Net profit: $2 per customer
Sources & References
This information is sourced from authoritative government and academic institutions:
- sba.gov
https://www.sba.gov/business-guide/manage-your-business/marketing
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Related Terms in Business & Investing
Break-Even Analysis
A calculation that determines the point at which total revenue equals total costs, showing how many units must be sold or how much revenue is needed before a business becomes profitable.
CAC (Customer Acquisition Cost)
The total cost of acquiring a new customer, including marketing and sales expenses.
Contribution Margin
The amount each unit sold contributes toward covering fixed costs and generating profit.
DSCR (Debt Service Coverage Ratio)
A measure of cash flow available to pay debt obligations, calculated as annual net operating income divided by annual debt payments.
ROAS (Return on Ad Spend)
A marketing metric that measures revenue generated for every dollar spent on advertising.
SBA Loan
A small business loan partially guaranteed by the U.S. Small Business Administration, offering longer terms and lower rates than conventional business loans.