Lifetime Value (LTV)

Without LTV, acquisition spend is guesswork. A channel that looks expensive may bring customers who stay for years, and a cheap one may bring customers who leave before they repay what they cost to win. LTV also shows how much retention is worth. Halve the monthly churn rate and the average lifespan doubles, which doubles LTV without a penny more spent on marketing.

• Work out margin per period first: revenue minus the real cost of delivering the service, not revenue on its own.
• Take lifespan from actual cohort data. A guess at how long customers stay gives a number nobody should trust.
• Calculate it per customer segment. A blended figure hides the best and worst accounts.
• Divide by acquisition cost and act on the LTV to CAC ratio, not on either number alone.
• Recalculate when pricing, churn or delivery costs change.

LTV answers a plain question: how much is a customer worth to the business over the time they stay? The usual sum is gross margin per period multiplied by average lifespan. Average lifespan is roughly one divided by the churn rate, so a customer base that loses 3 percent a month stays about 33 months on average.

Take a client who pays £1,000 a month, with a 70 percent gross margin after delivery costs. That is £700 of margin a month. Over 30 months the LTV is £21,000. Using revenue instead of margin would claim £30,000, and overstate the value of the client by almost half.

Using revenue instead of margin. Treating a young business's lifespan as known when only a few months of data exist. Counting expansion revenue that has not happened yet. For a new business, label the figure an estimate and refresh it as real cohorts age.