Calculating Lifetime Value
Lifetime value answers a single question: across the whole time someone is a customer, how much profit do they contribute? It is built from four numbers, each individually easy to estimate and each capable of shifting the final figure substantially.
Formula
LTV : CAC = LTV ÷ Customer acquisition cost
Gross margin is the step easiest to skip and most damaging to skip. Without it, LTV describes revenue passing through the business, not value the business keeps — a distinction that matters enormously once LTV is compared against CAC, since CAC is a real cost paid in real money, not revenue.
Reading the LTV:CAC Ratio
The ratio alone does not say whether a business is healthy — it says whether acquisition spend and the value it produces are in reasonable proportion.
Below 1:1 — losing money on every customer
Acquisition cost exceeds what the customer will ever contribute. Sustainable only if the plan depends on a small number of these customers referring many more profitable ones.
1:1 to 3:1 — thin
Technically profitable per customer, but with little room left for overhead, support, and everything else the business spends money on beyond acquisition and cost of goods.
3:1 to 5:1 — the healthy range
Wide enough margin between value and cost to fund the rest of the business and still grow. This is the range most investors and operators treat as the working target.
Above 5:1 — check whether growth is being left on the table
A very high ratio can mean genuinely exceptional unit economics, or it can mean acquisition spend is being held back below what the business could profitably afford, leaving growth on the table.
Estimating Lifespan Honestly
Customer lifespan is the input most often guessed rather than measured, and it is also the one with the largest effect on the final number, since it multiplies directly against everything else. A business assuming a 5-year lifespan when the real figure is 2 years overstates LTV by more than double.
Where churn rate is known, lifespan in years is approximately 1 divided by the annual churn rate — a business losing 25% of customers a year has an average lifespan near 4 years. Where churn is not tracked, a conservative estimate based on the oldest cohort with reliable data is safer than an optimistic guess, since LTV feeds directly into how much a business is willing to spend acquiring the next customer.