What is Customer Lifetime Value (LTV)?

Customer Lifetime Value (LTV) is a key performance metric that estimates the total revenue a customer will generate for your business over the course of their relationship. Unlike one-time purchase metrics, LTV provides a long-term view of customer profitability, helping businesses make smarter marketing investments, optimize ad spend, and refine retention strategies.

For programmatic advertisers and digital marketers managing high-volume campaigns, understanding customer lifetime value is essential for maximizing return on ad spend (ROAS), reducing customer acquisition costs (CAC), and improving retention-driven revenue growth.

How to Calculate Customer Lifetime Value (LTV)

There are multiple ways to calculate customer lifetime value, depending on the level of detail and business model. The most commonly used LTV formula is:

LTV = (Average Revenue Per Customer × Gross Margin) ÷ Churn Rate

Step-by-step calculation example:

1. Determine the Average Revenue Per Customer (ARPU) – Calculate the total revenue earned from all customers in a given period and divide it by the number of customers.

   • Example: If your monthly revenue is $120,000 and you have 1,000 customers, the ARPU is $120 per month.

2. Multiply ARPU by Gross Margin – Find your gross margin percentage and multiply it by ARPU.

   • Example: If your gross margin is 80%, then:

     • $120 × 0.80 = $96

3. Divide by Churn Rate – Churn rate is the percentage of customers lost over a given time period.

   • Example: If your monthly churn rate is 5% (or 0.05 in decimal form), then:

     • $96 ÷ 0.05 = $1,920

In this example, each customer is expected to generate an average of $1,920 in revenue over their lifetime.