What is LTV and how to calculate it?

LTV (Lifetime Value) is a metric that reflects the total profit generated by a single user over the entire duration of their interaction with a product or service.

How to calculate LTV:

1. Determine the period for which LTV is calculated (e.g., 6 months, 1 year).
2. Calculate the average revenue from one user during this period (ARPU).
3. Consider the user retention rate and the average customer lifespan.

The simplest formula:

LTV = Average revenue per user for the period × Number of interaction periods

For example, if a user on average brings in 500 rubles per month, and the average lifespan is 10 months, then LTV = 500 × 10 = 5000 rubles.

For a more accurate calculation, discounting of future revenues is used, and user churn is taken into account, for example:

LTV = ∑ (Revenue in period t × Retention probability in period t) / (1 + discount rate)^t

LTV helps evaluate marketing effectiveness, forecast revenues, and make product development decisions.