Lifetime Value (LTV)

Lifetime Value quantifies the long-run economic contribution of a single customer. It answers the question: if this customer stays, pays, and behaves like the average, how much gross profit will the business earn? That forward-looking number, compared against what it cost to acquire the customer, is the foundation of sustainable unit economics.

The simplest LTV formula for a subscription business is: LTV = (Average Revenue Per User × Gross Margin %) ÷ Monthly Churn Rate. If a SaaS product charges ₹3,000/month, retains 70% gross margin, and loses 2% of customers monthly, LTV = (₹3,000 × 0.70) ÷ 0.02 = ₹1.05 lakh per customer. The churn rate is the most sensitive input — halving churn doubles LTV.

For non-subscription businesses, LTV is estimated using average order value, purchase frequency, gross margin, and the number of years a customer is expected to remain active. The less predictable the purchase pattern, the wider the confidence interval around any LTV estimate — a caveat investors will probe.

LTV is most powerful when examined by customer cohort. A startup may find that customers acquired through a particular channel, or customers in a certain industry vertical, have dramatically higher LTV than the blended average. Concentrating acquisition on high-LTV cohorts is one of the most capital-efficient growth strategies available. Conversely, reporting blended LTV without acknowledging skew can mislead both founders and investors about where the real value is being created.