Customer lifetime value is what an average customer is worth over their whole time with you.

It matters because it sets how much you can afford to spend to win a customer.

A subscription customer pays a little every month, not everything at once. LTV adds those months up, so you can compare what a customer returns with what they cost to win.

It also shows which lever is worth pulling. The formula has three inputs, and a change in each moves the result by a different amount.

Multiply the margin a customer brings each month by the months they stay.

LTV = ARPU × gross margin % ÷ monthly customer churn rate
customer lifetime in months = 1 ÷ monthly churn rate

Use gross margin, not revenue: what is left of each payment after hosting, support and payment fees. Use the monthly churn rate if ARPU is monthly.

Keep the cost of winning the customer out of this number. LTV is what a customer returns and CAC is what they cost, and the two are most useful side by side, as a ratio.

Churn moves LTV more than anything else in the formula.

Halve churn from 2.5% to 1.25% and the average customer stays 80 months, so LTV doubles to $6,400. Raise ARPU by 10% and LTV rises by the same 10%, to $3,520.

You raise it by keeping customers longer, earning more from each and serving them for less.

• Lower churn, both kinds. Cancellations and failed payments both shorten the lifetime. See customer churn rate and involuntary churn.
• Raise ARPU over time. Upgrades, seats and add-ons lift what each month of the lifetime is worth.
• Improve gross margin. Lower hosting, support and payment costs per customer raise LTV at the same price.

A customer's lifetime starts at the first successful payment. 1Capture authorizes that payment when a free trial starts, so a card that cannot pay is turned away at signup and never enters your customer numbers as a first-month loss. See how it works.

These mistakes overstate LTV.

• Using revenue in place of margin. At 80% margin, $100 of ARPU is $80 toward LTV, not $100.
• Taking churn from too few months. With a small customer base, one good month gives a tiny churn rate and a huge LTV. Average several months.
• Treating the result as a fact. The formula assumes churn and ARPU never change. Check it against how long past groups of customers really stayed.
• Mixing units. Monthly ARPU needs monthly churn. A monthly figure paired with a yearly one gives a wrong answer.