- Formula
- Contribution margin/customer x avg lifespan; lifespan ~ 1/churn
- Unit
- $
- Models
- All models
| All | No published band — definitions vary wildly. Use contribution margin per customer (not revenue) divided by churn rate. Cohort/realized LTV is the honest version. | a16z 16 Startup Metrics |
What it is
Lifetime Value (LTV) estimates the total economic value a customer delivers over their relationship with the business. As a16z's 16 Startup Metrics emphasizes, LTV should be calculated on net profit (contribution margin), not revenue — using revenue overstates the metric and leads to poor capital allocation decisions.
How to calculate it
Multiply contribution margin per customer by average customer lifespan. When lifespan data is unavailable, it can be approximated as 1 / churn rate. The full formula is: LTV = (Contribution Margin per Customer) × (1 / Churn Rate). Cohort-based or realized LTV — tracking what actual cohorts have paid over time — is the most honest version.
Why it matters
LTV is foundational to unit economics, particularly the LTV:CAC ratio. It sets the ceiling on how much a business can rationally spend to acquire a customer. Across all business models — B2B and B2C — understanding LTV helps prioritize customer segments, justify retention investment, and model long-run profitability.
Benchmarks & pitfalls
As noted by a16z, there is no published aggregate benchmark for LTV — definitions vary too widely across companies and industries to make cross-company comparison meaningful. The directional guidance is to use net profit (contribution margin) in the numerator rather than revenue or gross profit. The biggest pitfall is inflating LTV through optimistic churn assumptions or by using revenue rather than margin. Cohort-realized LTV, while harder to compute, is far more reliable than modeled LTV for early-stage companies.