LTV (Lifetime Value)

LTV (Lifetime Value, sometimes CLV for Customer Lifetime Value) measures how much profit a single customer is worth over their entire relationship with the business. It's the ceiling on what you can spend to acquire that customer (CAC) while still running a profitable business.

The standard LTV formula

For a subscription business:

LTV = ARPU × Gross Margin × Average Customer Lifetime

Where:

• ARPU — average revenue per user per period (typically per month)
• Gross margin — revenue minus cost-of-goods (hosting, support, payment processing), as a %
• Average customer lifetime — 1 / churn rate

LTV calculator: worked example

A SaaS product has:

• ARPU = $50/month
• Gross margin = 80%
• Monthly churn rate = 5% → average lifetime = 1/0.05 = 20 months

LTV = $50 × 0.80 × 20 = $800 per customer

If CAC is $250, the LTV/CAC ratio is 3.2× — healthy. The CAC payback period (250 / (50 × 0.80) = 6.25 months) is also healthy.

If churn drops to 3% monthly, lifetime rises to 33 months and LTV jumps to $1,320 — a 65% LTV increase from a 2-point churn reduction. This is why churn dominates LTV math.

LTV/CAC benchmarks

Above 5× is sometimes a signal you're under-spending on acquisition — the business is leaving growth on the table.

Why the formula is approximate

1/churn overstates lifetime because it assumes churn is constant. In reality, customers who survive the first 3 months churn much more slowly than new ones (the "smile curve"). More sophisticated LTV calculations use cohort-based retention curves rather than a single average churn rate.

For early-stage companies with fewer than 12 months of data, any LTV calculation is largely guess. Use it directionally; don't over-interpret the precision.

What LTV is good for

• Setting CAC ceilings — LTV/CAC ≥ 3× is the standard target
• Comparing customer segments — enterprise LTV might be 10× SMB LTV, which informs where to direct acquisition spend
• Pricing decisions — a price increase that doesn't change churn rate increases LTV proportionally
• Justifying expansion investment — when NRR > 100%, LTV grows even without new acquisition

What LTV is bad for

How to grow LTV

In order of leverage:

1. Reduce churn — every 1pt churn reduction at 5% baseline grows LTV by ~20%
2. Expand existing customers — upsells, seat expansions, add-on modules (drives NRR > 100%)
3. Increase ARPU — pricing changes (less risky for new customers than existing)
4. Improve gross margin — hosting efficiency, payment fees, support automation

Related

• CAC — the cost side of the unit-economics equation
• Churn — the biggest LTV lever
• NRR — net revenue retention; when > 100%, LTV grows from existing customers alone
• Unit Economics — the broader framework LTV fits inside
• Cohort Analysis — the right way to measure lifetime