LTV
LTV (lifetime value) is the total revenue a single customer generates over the full span of their relationship with the business. It's the revenue counterpart to CAC: CAC tracks what was spent to acquire the customer, LTV tracks what came back. In practice it gets computed two ways: either by adding up actual revenue across a cohort and dividing by customer count, or by plugging average revenue per account, margin, and churn rate into a steady-state formula.
Definition
The total revenue a customer produces over the full course of their relationship with the offering, computed either as a steady-state per-customer rate (ARPA × Margin ÷ Churn) or as the cumulative revenue trajectory of a defined cohort.
Two formulations
LTV is calculated two structurally different ways in industry practice. The steady-state form is ARPA × Margin ÷ Churn — average revenue per account multiplied by gross margin, divided by churn rate. The cohort form sums actual revenue from a defined cohort's members across their lifetimes, normalized by cohort size.
The two are not interchangeable. The steady-state form computes a per-customer rate from aggregate base data: it averages across all currently-paying customers regardless of when they were acquired, what they were paying, or what pricing/plan/cadence they were on. The cohort form anchors to a specific group's actual paid history and tracks how their revenue accumulates over time.
Structural problems with the steady-state form
The steady-state formula inherits the same failure family as aggregate CAC ÷ ARPU: the denominator (churn) and the per-customer rate (ARPA) are both averaged across a survivor-skewed base whose composition doesn't match the cohorts whose value the metric is being used to claim.
ARPA reflects the full base's accumulated pricing history — long-tenured customers on legacy plans, annual contracts at older discounts, plan distributions reflecting years of upsell. New cohorts encounter only the current pricing/plan/cadence configuration. Aggregate churn similarly blends starting churn (recent cohorts' freefall) with sustaining churn (mature cohorts' flatter regime), producing a rate that doesn't apply to either population cleanly.
A team reporting "LTV is $X" from the steady-state formula cannot point at any specific cohort and say "those customers will produce $X." The number is a general-business-health ratio, not a measurement of value for any actual group.
The cohort form
Cohort LTV anchors to a defined cohort (typically a conversion cohort — customers who converted in a given month) and tracks cumulative revenue across the cohort's lifetime. Doing this correctly requires cohort-data apparatus: per-cohort revenue accumulation, retention-rate trajectories, an MRR or cashflow recognition convention, and visible delineation between actualized data and forward projection when the cohort is too young to have full lifetime data.
This formulation answers "what value did this specific cohort produce" rather than "what's the business's general per-customer ratio." It's structurally sound where the steady-state form isn't.
Relationship to VPS
Value-per-signup is the signup-cohort analogue of cohort LTV. Cohort LTV normalizes lifetime revenue by customer count; VPS normalizes it by signup count. The shift in denominator reflects the signup-cohort discipline that activation work depends on — the population whose value the offering is being asked to support starts at signup, not at conversion. Both metrics measure the same underlying quantity (lifetime revenue produced by a cohort); they differ in which entry event defines the cohort and therefore which denominator the magnitude is read against.
Example
A company reports LTV at $2,400. Pressed on which formulation, the team explains: ARPA is $80/month, gross margin is 75%, monthly churn is 2.5%, so LTV = (80 × 0.75) ÷ 0.025 = $2,400.
The number is reported confidently. But ARPA averages across customers acquired over the last five years, including a long tail on a legacy $200/month enterprise plan that was discontinued in 2022. Current new customers can only buy plans starting at $29/month. Churn averages across customers in months 1-3 (high) and customers in years 2-5 (low). The $2,400 figure doesn't apply to the cohort the team is using it to forecast — recent acquisitions on current pricing — in either the numerator or the denominator.
Recomputing as cohort LTV on the November 2023 acquisition cohort produces $640 actualized through month 18, with a projected $1,100 at month 60. The steady-state $2,400 overstates by roughly 2x.