What Is Customer Lifetime Value?
LTV is the total revenue expected from a customer over their relationship with your business. It's the return on your customer acquisition investment and determines how much you can spend to grow.
Definition
Customer Lifetime Value (LTV, also written CLV) is the total net revenue a business expects to earn from a customer over the entire duration of the relationship. For SaaS: LTV = ARPU × Gross Margin × (1 / Churn Rate). A customer paying $200/month with 80% gross margin on a 2% monthly churn rate has LTV = $200 × 0.80 / 0.02 = $8,000.
LTV should always be compared to CAC. The LTV:CAC ratio tells you whether customer acquisition is profitable and by how much. Most SaaS investors want to see LTV:CAC of 3:1+, with a payback period under 18-24 months.
LTV can be increased by reducing churn (customers stay longer), increasing ARPU through upsells (customers pay more), or improving gross margins (keep more of each dollar). The leverage on LTV from churn reduction is particularly powerful — halving monthly churn can double or triple LTV.
Real-World Example
Two SaaS companies have the same $200/month ARPU and 80% gross margins. Company A has 3% monthly churn: LTV = $200 × 0.80 / 0.03 = $5,333. Company B has 1% monthly churn: LTV = $200 × 0.80 / 0.01 = $16,000. Same product, 3x the value — just from halving churn. This is why retention is the highest-leverage activity in SaaS.
Why It Matters
LTV determines how much you can spend to acquire each customer (CAC ceiling) and signals how much the business is actually worth. A high-LTV customer base justifies aggressive growth investment; a low-LTV base means you must be capital-efficient.
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Frequently Asked Questions
Should LTV be calculated on gross margin or revenue?
Gross margin LTV (also called LTV on contribution margin) is more accurate — it shows what you actually keep after delivering the service. Using raw revenue inflates LTV and makes unit economics look better than they are. Investors will always ask for gross margin-adjusted LTV.
What is the difference between LTV and LTV:CAC ratio?
LTV is an absolute dollar amount — the total value of a customer. LTV:CAC is a ratio comparing that value to the cost of acquisition. LTV alone doesn't tell you if the business is viable; you need it relative to CAC. A $10,000 LTV is great if CAC is $2,000 but terrible if CAC is $15,000.
How long does it take to realize full LTV?
LTV is a lifetime estimate, but businesses discount future revenue. Many investors use a 3-5 year LTV to be conservative (customers who stay 10 years are great but their future payments shouldn't be valued at full face value). CAC payback period (months to recover CAC from gross margin) is often used alongside LTV as a more concrete metric.
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