The total gross profit a customer is expected to generate over the whole relationship, usually annual revenue times gross margin divided by the churn rate.
Using gross profit rather than revenue is essential, since the cost of serving a customer is real. The ratio of LTV to customer-acquisition-cost is the standard health test, with 3 times often cited as adequate.
The estimate is fragile because it compounds an uncertain churn assumption over many years. A small increase in churn-rate shortens the life dramatically, so present LTV as a range and stress the churn input.
Example: Northwind Cloud earns $3,600 a year at 78% gross margin from a customer lasting 5.6 years, giving $15,700 of lifetime gross profit against $4,100 of CAC, a 3.8 times ratio.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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