Term · Business Model & Operating KPIs
LTV
In briefLTV (Customer Lifetime Value) estimates a customer's total contribution margin over the expected relationship duration. Set against acquisition costs, it shows whether customer acquisition creates value. As an assumption-driven estimate, it is sensitive to assumptions on retention duration and margin and often appears too optimistic.
Definition
LTV (Customer Lifetime Value) estimates the total contribution margin that a customer generates over the expected duration of the business relationship. Revenue, margin, and expected customer retention duration feed into the calculation. The LTV is frequently set against customer acquisition costs.
How it is calculated
Formula. LTV ≈ (average contribution margin per customer and period ÷ churn rate)
Why it matters for small caps
In high-growth small caps, the ratio of LTV to acquisition costs shows whether customer acquisition creates value. A low LTV/CAC ratio calls the sustainability of growth into question.
Common misreadings
- The LTV is not an actual figure but an estimate that depends heavily on assumptions about retention duration and margin and easily turns out too optimistic.
In the process
Frequently asked
How do LTV and CAC relate?
The ratio of LTV to CAC shows how many times the customer value covers the acquisition costs. A value well above one is considered an indication of sustainable customer acquisition.
Which assumptions drive the LTV?
Above all the expected customer retention duration or churn rate and the assumed margin. Small changes to these assumptions shift the value considerably.
Why is caution warranted with reported LTV values?
Since there is no uniform calculation, companies can choose favorable assumptions. Without disclosure of the methodology, the value is hard to compare.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.