Why does Lifetime Value (LTV) matter?
LTV justifies what you can afford to spend acquiring customers, which makes it the most consequential number early-stage founders invent. It is built on an assumed lifetime, and a young company has no lifetime data by definition. Every early LTV is a forecast wearing the costume of a fact. Treated honestly it is useful for comparing segments. Treated as measured, it authorizes acquisition spending the business cannot actually support.
What does Lifetime Value (LTV) look like in practice?
At $160 a month in gross profit and 5% monthly churn, the implied lifetime is about twenty months and LTV lands near $3,200. Change churn to 8% and it falls to roughly $2,000. The same business, a different conclusion about what you can spend. Which is why the honest presentation states the churn assumption rather than only the answer, and why LTV:CAC ratios quoted without that assumption should be read sceptically.
What are the common mistakes with Lifetime Value (LTV)?
- Using revenue rather than gross profit.
- Assuming a lifetime longer than the company has existed.
- Quoting an LTV:CAC ratio without stating the churn assumption underneath it.
- Leaning on LTV when payback period is the metric that actually constrains growth early.
Related concepts
- Unit EconomicsWhat it costs to acquire and serve one customer versus what that customer is worth. The question of whether the business works at the level of a single customer.
- ChurnThe rate at which customers stop paying you, counted either as customers lost (logo churn) or as revenue lost (revenue churn), which can differ sharply.
- CAC Payback PeriodHow long it takes for the gross profit from a customer to repay what you spent acquiring them.