Definition
Customer lifetime value (LTV) estimates the total a business earns from an average customer over the whole time they stay. A simple version multiplies the average monthly revenue per customer by the gross margin, then divides by the monthly churn rate. Some businesses calculate it on revenue rather than gross profit, which makes it look larger. Because it is a model rather than a record, it is only as reliable as its assumptions about margin and churn.
Gross margin is revenue minus the direct cost of what a business sells, shown as a percentage of revenue. It shows how much each sale contributes towards overheads and profit.
Churn is the rate at which a business loses customers or recurring revenue over a period. Customer churn and revenue churn can tell very different stories.
Worked example
Lumenfield Scheduling is a fictional Canadian software business. A typical customer pays C$100 a month, gross margin is 80% and monthly churn is 2%.
- Gross profit per customer is C$80 a month.
- At 2% monthly churn, the average customer stays about 50 months.
- LTV is C$80 multiplied by 50, which is C$4,000.
If it costs C$1,000 to win a customer, each one returns four times that cost over their lifetime, provided churn holds.
Why buyers care
Sellers use LTV to justify marketing spend and growth plans. Small changes in the churn assumption swing it sharply: at 4% monthly churn, the same customer is worth C$2,000, half as much.
Ask how LTV was calculated, whether it uses revenue or gross profit, and which period the churn rate comes from. Then check it against cohort data: what have customers who joined two years ago actually paid so far? Observed cohort revenue is better evidence than a formula, especially for a young business with little history.