Lifetime value of a customer — for repeat-purchase retail and for subscription businesses.
The simplest form multiplies average order value by how often a customer buys in a year and how many years they stay. Add profitability by multiplying by gross margin: LTV = AOV × purchases/year × lifespan × gross margin. That converts a revenue figure into the gross profit a customer actually generates.
Subscription businesses don't have a fixed lifespan, so lifetime comes from churn: LTV = ARPU × gross margin ÷ monthly churn rate. The average customer lifetime in months is 1 ÷ churn rate, so a 5% monthly churn implies a 20-month average life.
Retail: a customer spends $60 per order, buys 4 times a year, and stays 3 years. Revenue LTV = 60 × 4 × 3 = $720. At a 40% gross margin, profit LTV = 720 × 0.40 = $288. Subscription: ARPU of $30/month at 80% margin and 5% monthly churn gives an average life of 20 months and LTV = 30 × 0.80 × 20 = $480.
The margin-based figure is the honest one. Compare gross-profit LTV against your customer acquisition cost, not revenue LTV, or you'll overstate what each customer is worth and overspend on acquisition. The single ratio that tells you whether the unit economics work is the LTV:CAC ratio — aim for roughly 3:1 or better. If you're modelling the return on a specific campaign instead, use marketing ROI.
How do you calculate customer lifetime value? For retail, AOV × purchases per year × lifespan in years. For subscriptions, ARPU × gross margin ÷ monthly churn, where average lifetime is 1 ÷ churn.
Should LTV use revenue or margin? Margin, for unit economics. Multiplying by gross margin gives the profit a customer is worth, which is what you can honestly set against acquisition cost.
How does churn affect LTV? Churn determines lifetime. Lower churn means a longer average life (1 ÷ churn) and therefore a higher LTV; small churn improvements compound into large LTV gains.
