What is lifetime value?

Lifetime value measures the total revenue you make from each customer over the lifetime of the relationship.

Why is lifetime value important?

Investors use lifetime value to understand a company's viability.

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A company may have incredible user growth but the LTV:CAC ratio shows whether the current model for acquisition is sustainable. A company needs the LTV to cover not only customer acquisition costs but overhead from creating/selling the product/service and the company's bottom line goal: profit!

CAC can change overtime, and often becomes more expensive for paid channels as a market becomes more competitive. LTV shows how well a company is retaining its customers. High retention means the company may not have to focus as much on growing their top of the funnel longterm and can grow in part by expanding their offerings for existing customers.

High lifetime value can balance a high customer acquisition cost. If a startup pays $200 to acquire each customer and the customer spends $500 on their first transaction and $6,000 over the course of their relationship, the payback period is immediate and the LTV is 30x of CAC. Investors love immediate payback. 😇

Low lifetime value can surface a retention problem. If a startup pays $200 to acquire each customer and the customer spends $100 on their first transaction and $200 over the course of the relationship, the LTV:CAC ratio is 1:1 and the business can't make money. The company will have to pull back on spend.

At the earliest stages, startups may only have a hypothesis about LTV. As an investor, try to understand how they're thinking about pricing and how long they believe they can retain customers (and why!)

Related resources

• Elizabeth Yin on CAC and payback period
• Lessons from running a business with unsustainable CAC, Andrew Wilkinson
• The Burn Multiple, David Sacks
• Marketing funnels in simple terms, Elizabeth Yin
• The mechanics of unit economics, Hustle Fund