What is CLV / LTV (Customer Lifetime Value)?

Customer lifetime value (CLV or LTV) is an estimate of the gross profit an average customer will bring in from signup until they cancel, which tells revenue and finance teams how much they can afford to spend to win one.

At a glance

• CLV and LTV are the same metric under two names.
• Basic formula: LTV = ARPA × gross margin ÷ customer churn rate.
• It’s a forecast, not a historical number, so treat it as a range.
• The common rule of thumb, from David Skok, is LTV at least three times CAC.
• Work it out by segment or cohort. One blended LTV hides the customers who pay back and the ones who don’t.

How to calculate LTV

Start with ARPA, the average monthly revenue per account. Multiply by gross margin, because LTV should count what a customer contributes after the cost of serving them. Then divide by monthly customer churn, which turns a monthly figure into an expected lifetime.

Example (illustrative): ARPA is $1,000 a month, gross margin is 80% and monthly churn is 2%. LTV is $1,000 × 0.80 ÷ 0.02, or $40,000. If churn rises to 3%, LTV drops to about $26,700, which is why small changes in churn move this number so much.

Where the basic formula goes wrong

ChartMogul points out two weaknesses. The formula assumes churn is steady, while most cohorts lose the most customers in their first three months, so it tends to overstate LTV. And it ignores expansion: a customer who upgrades twice in a year is worth far more than the formula says.

ChartMogul’s 2026 study of 35,512 customer cohorts found that for 28.3% of them, actual revenue differed from the LTV predicted at signup by more than 50%. It also found price can cut the other way: the lowest-paying signup quartile kept 74% of customers after 12 months, against 45% for the highest-paying quartile.

Common LTV mistakes

• Using revenue instead of gross margin. Revenue-based LTV makes every customer look more valuable than they are, and the LTV:CAC ratio looks healthier than it is.
• One blended number. Small and large accounts churn differently. Split LTV by segment, channel and signup cohort.
• Using a churn rate from a good quarter. A trailing average, ChartMogul uses six months, is steadier than the latest month.
• Ignoring expansion. If customers often grow, use a model that includes it, such as Skok’s version with an expansion rate and a discount rate.
• Reading LTV without payback. A high LTV that takes three years to arrive still has to be funded in cash today.

How LTV shows up in a revenue system

LTV only becomes a decision when it’s put next to CAC, which is one of the numbers a partner sees from the teams we run. DigitalOcean needed a regional outbound team inside its own commercial organization. We hired, trained and ran it, and CAC came in 37% lower. Read the DigitalOcean story.

Terms that sit next to LTV

LTV is the top half of the LTV:CAC ratio, with CAC below it and the CAC payback period as the cash view. It falls with churn rate and rises with net revenue retention.