What is Lifetime Value?

Lifetime Value represents the cumulative economic contribution of a customer from acquisition through churn. For a subscription business, it's calculated as Average Revenue Per User (ARPU) × Average Customer Lifetime (1 ÷ monthly churn rate). For e-commerce, it's average order value × purchase frequency × average customer lifespan. Both give you a single number: how much, on average, is a new customer worth to you over time?

LTV directly governs how much it makes sense to spend to acquire a customer. If your LTV is $500, spending $400 in CAC leaves only $100 margin before accounting for cost of goods and overhead — the business is likely marginal or unprofitable. If your LTV is $5,000 and CAC is $500, you have room to grow aggressively. This is why premium products with high LTV (enterprise software, luxury goods, financial services) can sustain much higher acquisition costs than commodity products.

Improving LTV is often more impactful than reducing CAC. Increasing average order value, improving retention (reducing churn), expanding revenue from existing customers (upsell and cross-sell), and building products customers return to repeatedly all increase LTV. A 10% improvement in retention can increase LTV by 30% or more, depending on the shape of the churn curve.