Customer Lifetime Value (LTV / CLV)
LTV is how much money a customer will spend with you over the whole time they're your customer. If someone pays $100/month and stays for 2 years on average, their LTV is $2,400. It tells you how much it's worth spending to acquire a customer.
Customer Lifetime Value (LTV or CLV) is the total net revenue a business expects to generate from a single customer over the entire duration of the relationship. It is a foundational metric for determining how much to invest in customer acquisition and retention.
Basic LTV formula (SaaS):LTV = Average Monthly Revenue per Customer × Gross Margin × (1 / Monthly Churn Rate)
For a company with $500 ARPU, 75% gross margin, and 2% monthly churn: LTV = $500 × 0.75 × (1 / 0.02) = $18,750
LTV:CAC ratio:The ratio of LTV to customer acquisition cost is a key unit economics metric. A ratio above 3:1 is generally considered healthy in B2B SaaS. Below 1:1 means you're spending more to acquire customers than they're worth.
Payback period:How many months of revenue it takes to recover CAC. Most investors look for payback periods under 18 months for growth-stage SaaS.
Limitations:LTV calculations assume stable churn rates, which rarely hold. More sophisticated models use cohort-based retention curves. LTV also doesn't capture support costs or service costs, which can significantly impact actual economics.
Key Takeaways
- LTV:CAC above 3:1 is typically the minimum threshold for a viable B2B SaaS business
- LTV is highly sensitive to churn rate — small improvements in retention dramatically increase LTV
- Use cohort-based LTV analysis for more accurate projections than static formulas
- Segment LTV analysis often reveals that top segments have 3–5x the LTV of bottom segments
Common Questions
What's the difference between LTV and LTV:CAC?
LTV is the absolute expected revenue per customer. LTV:CAC is the ratio that tells you how efficient your acquisition is — whether the value created exceeds the cost of acquisition.
How do I increase customer LTV?
Primary levers: reduce churn (retention programs, onboarding improvement, customer success), increase expansion revenue (upsells, cross-sells), and increase average contract value (better pricing, value-based upsell paths).