LTV (Lifetime Value)

Definition

LTV is the total revenue a business expects to earn from a single customer over the entire duration of the relationship, including repeat purchases, renewals, and referrals. A lawn care company that charges $150 per visit, books 20 visits per year, and retains customers for an average of 3 years has an LTV of $9,000 per customer. LTV is the other half of the CAC equation: you cannot know whether acquisition spending is rational until you know what a customer is actually worth.

How It Works

The basic LTV formula is: average purchase value, multiplied by average purchase frequency per year, multiplied by average customer lifespan in years. A service business with a subscription model has a more predictable LTV than one dependent on one-time projects. Referrals can be factored in as a multiplier if you track them consistently.

LTV is an estimate, not a hard number. It depends on your retention rate: if customers churn quickly, LTV collapses. A business that acquires customers cheaply but fails to serve them well ends up with low LTV and constantly needs to refill the top of the funnel. Improving retention and follow-through is often the most effective way to grow LTV without touching acquisition at all.

Why It Matters

LTV sets the upper bound on what you can afford to spend to acquire a customer. A healthy LTV-to-CAC ratio is typically 3:1 or better. If your LTV is $900 and your CAC is $600, you have almost no room for error. If your LTV is $6,000 and your CAC is $400, you have significant room to invest in growth. Understanding LTV also reframes how you think about customer service, follow-up, and repeat business. Every dollar you spend keeping an existing customer is almost always cheaper than the cost of replacing them with a new one.

Example

A HVAC company runs maintenance contracts at $250 per year. Customers who start on maintenance contracts book repair calls at about twice the rate of those who do not, averaging $400 in additional annual revenue. Customers stay for an average of 5 years. LTV per maintenance contract customer: ($250 + $400) x 5 = $3,250. Knowing this, spending $300 in ads and follow-up time to close a single maintenance contract customer is clearly justified. The company that does not know its LTV would look at $300 per acquisition as risky.

Related Terms

CAC, ROAS, Conversion Rate, Attribution Model

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