Monetization: LTV, Payback and the Formula That Lies
By the end of this lesson, you should be able to: break revenue into its parts, explain what lifetime value (LTV) means and how the standard formula estimates it, say when that formula is wrong and in which direction, and use payback period to decide how much to spend on getting a user.
Revenue has three parts
For most consumer products, revenue breaks down the same way.
Spotify is a clear example. At the end of 2025 it had 751 million monthly active users, and 290 million of them were Premium subscribers, about 39%. Each subscriber brought in €4.63 a month on average.
Check that it adds up. Spotify averaged about 276 million subscribers over 2025. Multiply by €4.63 a month and by 12 months, and you get about €15.35 billion. Spotify's reported Premium revenue for 2025 was €15,350 million.
Each part is a separate lever, run by different teams.
- Users. The free, ad-supported tier brings people in.
- Share who pay. Spotify says most new Premium subscribers come from converting its free users.
- Revenue per paying user. Price increases and the mix of plans and countries, as lesson 14 showed.
When revenue moves, find which of the three moved first. A revenue problem that's really a conversion problem needs a completely different fix from one that's really a pricing problem.
What a user is worth: LTV
Lifetime value (LTV) is the total revenue you expect from one user over their whole time with you. It answers a practical question: how much can we afford to spend to get a new user?
The standard formula is short.
The logic: if 5% of users leave each month, the average user stays 1 ÷ 5% = 20 months. At $10 a month, that's $200. (For a profit view, multiply by your gross margin too. The rest of this lesson uses revenue to keep it simple.)