LTV (customer lifetime value)

LTV is the total value a customer generates across their relationship with the business. Computed on revenue it is a flattering fiction, because revenue cannot pay for an acquisition — only contribution margin can. An LTV that has not had product cost, fulfillment, and fees removed will justify acquisition spending the business cannot actually fund.

The second failure is more subtle: LTV is a projection, which makes it the most negotiable number in this glossary. Every input is an assumption you control, so a target ratio can be reached by adjusting a churn rate in a spreadsheet rather than by improving anything. That is why LTV should be built from realized cohort curves — what customers acquired twelve months ago have actually produced since — rather than from a model of what future customers might do.

For subscription businesses the standard shortcut is monthly contribution margin divided by monthly churn rate. At $50 monthly margin and 5% churn that gives $1,000. The formula assumes churn is constant, and it almost never is: cancellations concentrate in the first few months, so a business losing 12% in month one and 3% thereafter has a blended rate that understates early loss and therefore overstates LTV. Where early churn is heavy, the shortcut can be wrong by a third or more.

Segmentation is where LTV becomes decision-grade rather than decorative. LTV by first product purchased and by acquisition channel routinely varies two to three times within one business — a customer whose first order was the flagship behaves differently from one who entered on a discounted accessory, and a customer acquired on brand search behaves differently from one acquired on a prospecting video. A single blended LTV averages those populations into a number that describes none of them, and then gets used to set one CAC ceiling for all of them.

The consequence of getting this right is an allowable acquisition cost that varies by entry point. If flagship-entry customers are worth $900 in margin and accessory-entry customers $280, those are two different businesses sharing a catalog, and paying the same CAC for both means overpaying for one and starving the other of budget it could profitably absorb.

Treat LTV as a portfolio and planning input, and let CAC payback govern month-to-month decisions. Payback uses only cash already observed, so it cannot be talked upward by an assumption. LTV sets the ceiling on ambition; payback tells you whether you can survive reaching for it.