LTV (Lifetime Value)

Lifetime Value measures the total revenue (or profit) a customer generates over their relationship with your business.

Definition

Lifetime Value (LTV), also written as CLV (Customer Lifetime Value), is the total revenue or profit generated by a customer over the entire duration of their relationship with your business.

Simple Formula: LTV = Average Revenue Per Customer Per Month × Average Customer Lifetime (months)

Margin-adjusted Formula: LTV = (Average Revenue Per Customer Per Month × Gross Margin %) × Average Customer Lifetime

Why LTV Matters

LTV tells you the upper bound of what you can profitably spend to acquire a customer (CAC). The LTV:CAC ratio is one of the most closely watched metrics in venture-backed startups.

• LTV:CAC > 3x — Healthy for most SaaS businesses
• LTV:CAC < 1x — You're losing money on every customer
• LTV:CAC > 10x — You may be under-investing in growth

Calculating Average Customer Lifetime

Average Customer Lifetime = 1 ÷ Monthly Churn Rate

Example: If your monthly churn rate is 5%, your average customer lifetime is 1 ÷ 0.05 = 20 months.

Common LTV Mistakes

Ignoring churn: An LTV model that assumes customers never leave is dangerously optimistic.

Using revenue instead of gross margin: If your gross margin is 60%, a customer generating $1,000 in revenue delivers only $600 in gross profit — and that's what pays for your overhead.

Mixing cohorts: LTV should be calculated by cohort (customers acquired in the same period) to see how it changes over time.

Improving LTV

LTV improves through: - Reducing churn (retention improvements) - Increasing average revenue per user (upsell, cross-sell, expansion) - Improving gross margins (pricing, cost of service reduction)