{"id":21750,"date":"2019-10-09T15:37:50","date_gmt":"2019-10-09T21:37:50","guid":{"rendered":"https:\/\/www.vendasta.com\/blog\/?p=21750"},"modified":"2026-01-09T22:14:45","modified_gmt":"2026-01-09T22:14:45","slug":"what-is-customer-ltv","status":"publish","type":"post","link":"https:\/\/www.vendasta.com\/blog\/what-is-customer-ltv\/","title":{"rendered":"What is customer lifetime value (LTV) and how to calculate it"},"content":{"rendered":"

[et_pb_section fb_built=”1″ _builder_version=”4.16″ global_colors_info=”{}”][et_pb_row _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Introduction” _builder_version=”4.16″ global_colors_info=”{}”]\u201cWe\u2019ve got to find a way to either increase the customer LTV or reduce the CAC,\u201d <\/span><\/em>commanded Cliff.<\/span> \u201cIf anyone has any ideas, now is the time to speak up and be the hero this company deserves.\u201d<\/span><\/em><\/p>\n

Cliff Hanger, the CEO of a rising media agency, wore a frown as he spoke those words while entering the boardroom with a cup full of black coffee. His Tuesday hadn\u2019t started in the manner he had hoped for. Not only did he not find his usual parking spot, but he was also just given some drastic news by his CFO that had forced him to call an emergency meeting.<\/span><\/p>\n

\u201cWe could do that in many ways,\u201d <\/span><\/em>said Miranda, the Revenue Manager<\/span>. <\/span><\/i>\u201cBut my advice would be to increase our customer LTV by increasing our ARPA.\u201d<\/span><\/em><\/p>\n

The top executives were discussing the future of the business. Something that would involve amending a few vital strategies and would impact sales, revenue, and most importantly their customers.<\/span><\/p>\n

\u201cWon\u2019t reducing the churn also work well?\u201d<\/span><\/em> asked Kurt, the Marketing Manager.\u00a0<\/span><\/p>\n

His team had been working hard for the last couple of months to brainstorm ways in which they could keep customers from leaving. The team even came across a valuable <\/span>churn study<\/span><\/a> and was excited to present their findings later that week.<\/span>[\/et_pb_text][et_pb_image src=”\/blog\/wp-content\/uploads\/sites\/6\/2025\/07\/churn-study.webp” alt=”churn study” title_text=”churn study” url=”\/content-library\/guides\/client-churn-study\/” url_new_window=”on” align_tablet=”center” align_phone=”” align_last_edited=”on|desktop” admin_label=”Churn Image” _builder_version=”4.27.4″ global_colors_info=”{}”][\/et_pb_image][et_pb_text admin_label=”Second Paragraph” _builder_version=”4.16″ global_colors_info=”{}”]\u201cYou\u2019re right. It will,\u201d<\/span><\/em> Miranda responded. <\/span>\u201cBut I believe we would be more in control with the ARPA route.<\/span> I read a book recently that said that the probability of selling to an existing customer is greater than selling to a new prospect<\/span>.<\/span>\u201d<\/span><\/em><\/p>\n

Tim, the aspiring new recruit fresh out of business school, had also read that book. It was called <\/span>Marketing Metrics<\/span><\/i>. He was hired to do basic marketing stuff but had been asked to sit in these financial strategy meetings by Kurt, his manager.<\/span><\/p>\n

\u201cAh, so by upselling to our existing customers we can increase the MRR, which would then increase the ARPA, which would then increase the customer LTV. That\u2019s brilliant Miranda,\u201d <\/span><\/em>said Cliff jubilantly as his guzzled the last of his coffee down.<\/span><\/p>\n

Just like any other person who is not a financial wizard and does not have any inclination towards those complex financial jargons, Tim was now completely lost.\u00a0<\/span><\/p>\n

\u201cWhat the heck are these guys talking about?\u201d<\/span><\/em> he asked himself while sitting at the very end of the boardroom. He knew that agencies had a tendency to use three-letter acronym (TLA) terms very liberally, but this was getting out of hand.<\/span><\/p>\n

\u201cShould I be throwing in a couple of TLAs of my own?\u201d <\/span><\/em>he wondered. <\/span>\u201cCustomer LTV maybe? After all that is the theme of this meeting. I better Google some stuff before speaking though,\u201d<\/span><\/em> he thought.<\/span><\/p>\n

Wise move, Tim. Wise move.<\/span>[\/et_pb_text][et_pb_text admin_label=”What is Customer LTV – 1″ _builder_version=”4.19.2″ global_colors_info=”{}”]<\/p>\n

What is Customer LTV?<\/span><\/h2>\n

A quick Google search took Tim to the <\/span>Economic Times<\/span><\/a> website that defined customer lifetime value (LTV)<\/a> as:\u00a0<\/span><\/p>\n

\u201cThe present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with the company.\u201d<\/strong><\/p>\n

\u201cHmm, that does not clear things up,\u201d<\/span><\/em> Tim scoffed. A more detailed search, however, gave him a much clearer understanding.<\/span><\/p>\n

[\/et_pb_text][et_pb_text admin_label=”What is Customer LTV – 2″ _builder_version=”4.16″ global_colors_info=”{}”]Simply put, customer LTV is the total value that a customer provides to a business during their business relationship tenure. Looking at that figure, companies can decipher an approximate amount they can earn from customers during the time period they do business with them.<\/span><\/p>\n

Doesn\u2019t seem too complex now, does it?<\/span><\/p>\n

\u201cBut why do companies care how much value they can get out of a customer? Isn\u2019t the monthly recurring revenue (MRR) the only metric worth keeping a track of?\u201d<\/span><\/em> wondered Tim, recalling the story of Penny and her <\/span>tryst with MRR<\/span><\/a>.\u00a0<\/span><\/p>\n

At least there was one TLA that he was comfortable floating around. He did another quick Google search to find out more about the importance of customer LTV.<\/span>[\/et_pb_text][et_pb_text admin_label=”Why is Customer LTV important? – 1″ _builder_version=”4.16″ global_colors_info=”{}”]<\/p>\n

Why is Customer LTV important?<\/span><\/h2>\n

The primary reason that customer LTV is important is because the metric helps companies put things into perspective with regard to managing their business spends and becoming more profitable.<\/span><\/p>\n

Tim felt much more connected to the research he was doing this time around because it involved a lot of familiar terms. For example, he came across a metric called <\/span>customer acquisition cost (CAC)<\/span><\/a> that companies considered critical in relation to the customer LTV.<\/span><\/p>\n

He remembered one of his marketing professors mentioning how the costs associated with sales and marketing are important because they contribute directly to the cost of acquiring a customer.<\/span><\/p>\n

\u201cOkay. But why does the CAC keep coming up when I\u2019m searching for the importance of customer LTV?\u201d<\/span><\/em> wondered Tim while feeling proud of himself for using two TLAs together.<\/span><\/p>\n

Read on, Timmy boy. Read on.<\/span><\/p>\n

The reason why CAC and customer LTV are almost always talked about in tandem is because, for an organization to sustain itself, it must implement a profitable business model. And to do so, it must always ensure that its customer LTV is higher than its CAC.<\/span>[\/et_pb_text][et_pb_text admin_label=”Why is Customer LTV important? – 2″ _builder_version=”4.16″ global_colors_info=”{}”]Therefore, a business can gamble with spending more on its sales and marketing elements, as long as it ensures that the value it receives from acquiring those customers trumps the total cost of acquisition. As a general rule, the optimum <\/span>customer LTV: CAC ratio<\/span><\/a> that companies always strive to achieve is 3:1.<\/span><\/p>\n

\u201cAh ha!\u201d<\/span><\/em> exclaimed Tim.\u00a0<\/span><\/p>\n

The conversation between Cliff, Miranda, and Kurt earlier had suddenly started to make sense. The customer LTV: CAC ratio for the company had fallen below the desired mark and hence the emergency meeting was called.<\/span><\/p>\n

\u201cBut how low could the ratio have fallen? If only there was some way for me to calculate the customer LTV and find out myself.\u201d<\/span><\/em><\/p>\n

And there went Tim. On yet another quest to search for more answers.<\/span>[\/et_pb_text][et_pb_text admin_label=”How to Calculate Customer LTV? – 1″ _builder_version=”4.16″ global_colors_info=”{}”]<\/p>\n

How to Calculate Customer LTV?<\/span><\/h2>\n

Tim found out that to calculate the customer LTV you must take the average revenue per account (ARPA) and divide that number by the customer churn rate.<\/span>[\/et_pb_text][et_pb_text admin_label=”How to Calculate Customer LTV? – 2″ _builder_version=”4.16″ global_colors_info=”{}”]He even came across a <\/span>template<\/strong><\/em><\/a> online that reduced all the hours of calculation to just a few seconds. All you had to do was to input a few variables and voila! There lay the answer.<\/span><\/p>\n

To further understand how to calculate the customer LTV and its dependent variables, Tim studied an example:<\/span><\/p>\n\n\n\n
Let\u2019s assume that company A has 200 active customers that it is currently servicing.<\/strong><\/em><\/p>\n

In addition to that, the total MRR that it generates is $100,000.<\/strong><\/em><\/p>\n

Company A has also identified that its monthly customer churn rate is 5%.<\/strong><\/em><\/p>\n

Using these figures, company A\u2019s ARPA can be calculated by taking its MRR and dividing that value by the number of active customers.<\/strong><\/em><\/p>\n

Therefore, ARPA = 100,000 \/ 200 = $500.<\/strong><\/em><\/p>\n

Finally, these values are used to calculate the customer LTV.\u00a0<\/strong><\/em><\/p>\n

Customer LTV = 500 \/ .05 = $10,000<\/strong><\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 [\/et_pb_text][et_pb_text admin_label=”How to Increase Customer LTV? – 1″ _builder_version=”4.16″ global_colors_info=”{}”]<\/p>\n

How to Increase Customer LTV?<\/span><\/h2>\n

Looking at all the research where he deciphered what customer LTV is and figured out how to calculate it, Tim finally understood what Miranda and Kurt were talking about earlier.<\/span><\/p>\n

If the aim of a company is to increase its customer LTV, it can do so in two primary ways:<\/span><\/p>\n