Average Lifetime Value (LTV) is the average revenue billed to a customer over their entire lifetime. High LTV often positively correlates with successful long-term service agreements and robust customer success strategies that focus on decreasing churn.
This metric helps to understand profitability on a customer level by comparing it to Customer Acquisition Cost (CAC). A higher LTV:CAC indicates that revenue generated from a customer over their lifetime with the business outweighs the cost of acquiring them. Ideally, LTV should be over twice the CAC. LTV informs customer segmentation, aligns acquisition spending with long-term profitability, drives planning for customer success initiatives, and helps pinpoint upsell and cross-sell opportunities.
Average Revenue Per Customer (ARPA) x Average Customer Lifespan
To calculate LTV, multiply the Average Revenue Per Account (ARPA) by the Average Customer Lifespan.
When analysing LTV, segment the data by customer type and acquisition source to detect which channels are producing the most valuable customers. Focus on driving up-sells and cross-sells, implementing customer loyalty programmes, reducing churn, and increasing re-activation. Ex-customers already understand the proposition and are likely to have a higher return on investment (ROI) compared to new customers.
LTV is not so much a revenue metric but more a profitability metric. Confusion often occurs when failing to account for Customer Acquisition Costs (CAC) required to generate the LTV.