Customer lifetime value
Sector Deep DivesThe gross profit a customer is expected to generate across the whole relationship, usually annual gross profit divided by the churn rate.
Also written: lifetime value, customer LTV, CLV, LTV to CAC
Lifetime value asks what one customer is worth in total. The standard construction takes annual gross profit per customer and divides by the annual churn rate, because a constant churn rate of one tenth implies an average life of ten years. The division is a perpetuity, and it carries the entire result.
Two errors recur. Using revenue instead of gross profit overstates the answer by the whole cost of serving the customer. Leaving the figure undiscounted overstates it again, because gross profit arriving in year nine is not worth its face value today, and most quoted lifetime values are undiscounted.
The comparison everyone reaches for is the ratio of lifetime value to customer acquisition cost, with three times treated as the threshold of a healthy business. That threshold is a convention rather than a finding, and the inputs are soft enough that a company can land on either side of it without misstating anything.
Where net revenue retention exceeds 100% the formula fails outright, since net churn is negative and the perpetuity does not converge. That is one reason many investors lean on CAC payback instead: a shorter horizon, fewer assumptions, and an answer that can be checked against the cash actually collected.
Worked example
A customer contributes 3,200 of annual gross profit and costs 12,000 to acquire. At 10% churn the implied life is ten years, lifetime value is 32,000 and the ratio to acquisition cost is 2.7 times.
Assume 8% churn instead and lifetime value becomes 40,000, a ratio of 3.3 times. Two percentage points of an estimated rate moved the company across the threshold.
Discount the 10% churn case at 10%: 0.9 divided by 1.1 is 0.818, and one less 0.818 is 0.182, so 3,200 divided by 0.182 is 17,600. The ratio falls to 1.5 times with nothing about the customer changed.