GuideThe numbers leadership asks about
LTV
Definition
Lifetime value: the gross profit a customer produces across the whole relationship, discounted because most of it arrives later. Every LTV is a forecast, and the churn assumption inside it does most of the work.
How it’s calculated
Start from contribution margin per order, or per month for a subscription. Multiply by orders per year, then by expected lifetime. Discount the later years, since money due in year three is worth less than money now. Expected lifetime is one divided by annual churn: at 40% churn a customer lasts two and a half years, at 20%, five. Halve the churn assumption and the LTV doubles, with no change in the customers themselves. A four-year LTV is also a poor input to a decision about this quarter’s cash: the spend leaves the bank now, while the profit that justifies it arrives over the following years, provided the churn assumption holds.
What to watch for
Open the model and find the per-order input: if it is revenue, the LTV overstates value by the entire cost of goods, shipping, fees and returns. Ask which cohort the churn rate was measured on; a rate taken from the oldest customers describes survivors, and the customers being bought this year have not been through that filter. Check whether year three is discounted or counted at face value. And when LTV is used to defend a rising CAC, put payback beside it, because the profit arrives on a different clock than the spend.
The question you ask
“Which churn rate is inside this LTV, and which customers was it measured on?”