What is customer lifetime value?

Customer lifetime value, or LTV, is the total profit a business expects from a customer from the first purchase until they leave. It shows how much a customer is worth, which sets how much the business can afford to spend to win and keep them. It matters because acquisition decisions only make sense when compared against it.

How it works

A simple version is: LTV = average margin per period × expected lifetime in periods. With constant churn c, expected lifetime is 1 ÷ c, so LTV = margin ÷ churn. A more careful version discounts later profits, because money received later is worth less today. LTV depends on three levers: what each customer pays, how much it costs to serve them, and how long they stay.

The trade-off is that raising price may increase margin but also increase churn. And since LTV is based on forecast behavior, it is only as reliable as the churn and margin assumptions behind it. It is most useful when compared with acquisition cost, as a ratio.

Example

Say a subscription costs 30 per month, and it costs 12 per month to serve, so margin is 18. Monthly churn is 4%, so expected lifetime is 1 ÷ 0.04 = 25 months. LTV = 18 × 25 = 450. If churn improves to 3%, lifetime becomes 33.3 months and LTV rises to 600. If the business spends 150 to win a customer, the first case returns 3 times the spend. These are illustrative numbers.

How to model it in Machinations

Create a Source of customers into a Pool, a Drain for churn, and a Source for monthly margin into a profit Pool that depends on the customer Pool's value through a state connection. A Register divides total profit by customers acquired. Set price, cost and churn as Levers. Play many times at once and compare LTV across settings.