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Business Models & Unit Economics

Customer Lifetime Value (LTV)

The gross profit one customer generates before they churn.

Your numbers

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Results

Average customer lifetime
33.3 mo
How long the average customer stays: 1 ÷ monthly churn
Gross profit per customer per month
$40
What one customer-month is actually worth after cost of service
LTV
$1,333.33
Total gross profit over the customer's expected life

How it works

LTV = ARPU × gross margin ÷ monthly churn rate.

The intuition: 1 ÷ churn is the average number of months a customer sticks around, and ARPU × margin is what each of those months is actually worth to you. Multiply them and you get the profit a customer delivers over their whole life.

The classic mistake is skipping the margin and using raw revenue — that inflates LTV and makes ugly unit economics look fundable. The second classic mistake is using an optimistic churn number from your best month. Use a trailing average, and use gross profit, always.

Worked example

A customer pays $50/month at an 80% gross margin, and 3% of customers churn each month. Average lifetime = 1 ÷ 0.03 ≈ 33 months. Monthly profit = $50 × 0.80 = $40. LTV = $40 × 33.3 ≈ $1,333. Using revenue instead of profit would have claimed $1,667 — a 25% overstatement.