Life Time Value or LTV is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer. This ‘worth’ of a customer can help determine many economic decisions for a company including marketing budget, resources, profitability and forecasting. It is a key metric in subscription based business models, along with MRR (Monthly Recurring Revenue).
Lifetime Value can be calculated in many ways. In the case of a subscription model, a simple method is to take the average monthly amount expected from each customer and divide it by your churn rate (the rate at which you lose customers each month). For example, if you charge $500 per month and your churn rate is 5% then your LTV for a new customer is (500/0.05) or $10,000. In this case, your customer’s expected ‘lifetime’ is 20 months.
For companies that use a non-subscription model, it is the total income you expect to gain from a new customer including any add-ons and/or upsells that you expect from the customer.
It is important to keep in mind that different types of customers can have different LTVs, especially when you have different pricing levels for your various plans and offers.