Lifetime Value (LTV)

Lifetime value — often abbreviated as LTV — is the measure of an individual user, client, or customer’s worth to a business from the moment they start using the product or service to the moment they churn — i.e. over their life cycle.

As an example, suppose you purchase a $2 song once per week from Apple every week for a year. At the end of that year, you sign up with Spotify and never purchase any music from Apple again. Your LTV for Apple’s music business would be ($2/week * 52 weeks/year) = $104.

The reason measuring LTV is so important is that it gives a more accurate measure of what a business should be willing to pay to acquire and support you as a user than would measuring, say, revenue associated with a single purchase or interaction, return on investment, or even (in many ways) user acquisition rate. It’s often far more difficult to measure, but it’s also far more valuable.

To see why, consider again the example above. Imagine that Apple’s music business took into account only the first transaction you completed with them. In that case, Apple should be willing to pay up to $2 to acquire and support you as a customer. Suppose, however, that it took Apple $5 worth of ads to acquire you, and $1 worth of infrastructure to support you for the year (support is cheap in this case, since Apple can amortize it across all their music business customers). By taking into account only your initial purchase, Apple would make a poor business decision that would cost them ($104 – $6) = $98 of profit! In other words, ignoring other potential business considerations related to brand, limited budgets, etc., and optimizing solely for profit, Apple should be willing to spend $102.99 to acquire you as a customer, netting them $0.01 profit after support. Of course, the hope is that it costs them far less to acquire you, and consequently they make far more profit off your purchases.

Note that LTV will vary by customer (and also likely by acquisition channel, platform, and method), so businesses often look at averages across customer segments to estimate how much they should expect to earn given their current customer base, as well as how much they should be willing to spend to acquire and support new customers. Note, too, that LTV does not generally take into account the time-value of money — money earned today is more valuable than money earned in the future — but LTV omits this future discounting for sake of simplicity.

In general, though, LTV is a far more important metric to look at than simply an individual purchase. Optimizing using LTV will lead to the best (most profitable) decisions for a business in the long term, rather than merely leading to the short-term bump in revenue that occurs when businesses optimize around initial customer purchases.