LTV calculation
How to Calculate Customer Lifetime Value (LTV)?
Customer lifetime value (LTV) is a vital metric that helps businesses estimate how much revenue the average customer will generate throughout their relationship with the brand. It’s especially important when evaluating marketing performance, customer acquisition strategies, and retention efforts.
To calculate LTV, you need to consider key factors such as:
One common formula for calculating LTV is:
LTV = Average Annual Revenue per Customer ÷ Customer Churn Rate
This method gives a simplified but powerful view of the value a customer brings to your business over time. At Recharge, for example, LTV is calculated using historical data from customers who have already left the platform, focusing on how much revenue they generated annually before churning.
Why understanding LTV calculation is key to business growth?
Knowing how to calculate LTV helps you answer critical questions about your business’s sustainability. When compared with customer acquisition cost (CAC), it shows whether you're gaining customers profitably or overspending to get them through the door. A high LTV means that customers are spending more, staying longer, or both. These are strong signs of brand loyalty and a positive customer experience. It also allows for more confident investment in growth, as you can forecast how much each new customer is likely to be worth.
By understanding and tracking LTV over time, you can:
Ultimately, LTV isn’t just a number. It is a lens into how well your business is building lasting customer relationships.
