What is LTV (Lifetime Value)?

Lifetime Value represents the total net revenue a business can expect from a single customer account throughout their entire relationship. It factors in average purchase value, purchase frequency, customer lifespan, and contribution margin to quantify how much each customer relationship is worth.

LTV is calculated in several ways depending on the business model. For subscription businesses: LTV = ARPU × Gross Margin × (1 / Churn Rate). For transactional businesses: LTV = Average Order Value × Purchase Frequency × Average Customer Lifespan × Contribution Margin. The key is capturing the full economic value of a customer, including repeat purchases, upsells, and referrals.

LTV is most powerful when paired with Customer Acquisition Cost (CAC). The LTV:CAC ratio tells you whether your customer relationships generate sufficient value to justify the investment in acquiring them. Venture capitalists closely scrutinize this ratio—a ratio below 1:1 means you're destroying value with every customer you acquire.

Improving LTV involves extending customer lifespans (reducing churn), increasing purchase frequency (engagement and loyalty programs), raising average order values (upselling and cross-selling), and improving margins (operational efficiency). In case interviews, understanding the levers for improving LTV demonstrates a holistic view of customer economics.

Real-world example

Starbucks estimates its average customer LTV at approximately $14,099 over 20 years. This high LTV justifies significant investment in loyalty programs, mobile app development, and premium store experiences.

Ready to put LTV (Lifetime Value) into practice?

MECE has worked cases, frameworks, and AI-graded practice — all free.

What is LTV (Lifetime Value)?

Related terms