A prediction of the net profit attributed to the entire future relationship with a customer. To calculate LTV, follow these steps for a given time period:
- Take the revenue the customer paid you in that time period.
- Subtract from that number the gross margin.
- Divide by the estimated churn rate (aka cancellation rate) for that customer.
For example, if a customer pays you $100,000 per year where your gross margin on the revenue is 70%, and that customer type is predicted to cancel at 16% per year, then the customer’s LTV is $437,500.