Definition
Lifetime value estimates what a client brings from the first to the last purchase. For a subscription, it is simply the monthly margin per client divided by the monthly churn rate; for orders, the margin per order multiplied by the number of orders expected.
In subscription software, a widely used benchmark, set out by investor David Skok, aims for an LTV at least three times the CAC and an acquisition cost recovered in under twelve months.
Value for a business owner
LTV sets the ceiling on what the company can spend to win a client without losing money. It also shows where the lever is: keeping a client longer raises LTV without spending anything on advertising.
At Stratedge Consulting
The CAC, LTV and payback calculator computes both and their ratio from your figures. In a leadership cockpit, LTV and churn are tracked by client segment.
Common mistakes
Calculating LTV on revenue rather than margin. The result overstates what a client brings, sometimes threefold.
Averaging very different client groups. An LTV per segment avoids overspending on clients who leave quickly.