Lifetime Value (LTV) is the total revenue a business can reasonably expect from a single customer account over its lifespan. LTV helps businesses understand the long-term value of customers and is crucial for determining how much can be spent on customer acquisition while remaining profitable.

LTV is typically calculated by multiplying the average revenue per user (ARPU) by the customer lifespan. Alternatively, it can be calculated using gross margin and customer churn rate for more accuracy.

Basic Formula

Advanced Formula (considering churn rate)

1. Basic Example: A customer pays $50 per month, and the average customer lifespan is 24 months. The LTV is:

\begin{align}LTV &= 50 \times 24 \cr&= 1,200 \text{ USD}\end{align}

2. Advanced Example: A customer pays $50 per month, the gross margin is 80%, and the churn rate is 5% per month. The LTV is:

\begin{align}LTV &= \frac{50 \times 0.8}{0.05} \cr&= 800 \text{ USD}\end{align}