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    Glossary›LTV
    Glossary · Metric

    What is Lifetime Value (LTV)?

    Definition

    Lifetime Value (LTV) is the total amount of profit or revenue expected from a customer over the entire duration of their relationship with the company. LTV is calculated by multiplying average revenue per customer per year by average customer lifespan in years (or using retention rate and margin to estimate lifetime contribution). LTV compared to Customer Acquisition Cost (CAC) determines business unit economics and sustainability.

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    EconomicsMetricsRetentionProfitabilitySaaSGrowth StrategyLTV
    In short

    LTV at a glance.

    Total expected profit over customer lifetime
    Combines revenue, retention, and cost
    Should be 3x to 5x higher than CAC
    Improving retention compounds LTV

    LTV and Retention Dynamics

    Small improvements in retention dramatically increase LTV. If a customer stays 2 years instead of 1 year, LTV doubles. If monthly churn drops from 5 percent to 4 percent, average lifespan increases from 20 months to 25 months, a 25 percent LTV gain. Because retention improvements benefit all customers simultaneously, improving retention is often higher ROI than reducing CAC or raising prices. The compounding effect is powerful.

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    LTV — frequently asked

    Simple method: multiply monthly revenue per customer by gross margin by expected customer lifespan in months. For example, a customer paying 100 dollars per month with 80 percent gross margin staying 36 months has LTV of 100 times 0.80 times 36 equals 2,880 dollars. More sophisticated models account for expansion, churn curves by cohort, and discount rate.

    Most SaaS businesses target 3:1 as minimum (3 dollars LTV for every 1 dollar CAC spent). Mature businesses often achieve 5:1 or higher. High-margin products and high-retention businesses can justify lower ratios, but sub-3:1 means acquisitions aren't paying for themselves and the business isn't sustainable without continuous capital infusion.

    Increase revenue per customer (pricing, expansion, add-ons), reduce churn (better onboarding, ongoing value communication, customer success), or reduce cost of goods sold (better efficiency). Most leverage typically comes from reducing churn—even 1 percent churn reduction can increase LTV by 5-10 percent depending on baseline.

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