What is LTV?
Customer Lifetime Value (LTV or CLV) is the total revenue a business can expect from a single customer account throughout their entire relationship. It factors in average purchase value, purchase frequency, and customer lifespan. LTV is the counterweight to CAC—together they determine whether your business model is sustainable or a path to bankruptcy.
Why LTV Matters
LTV tells you how much a customer is actually worth, which determines how much you can afford to spend acquiring them. A customer worth $50,000 over their lifetime justifies far more acquisition investment than one worth $5,000. Without LTV, you're guessing at acquisition budgets. The LTV:CAC ratio is the fundamental health metric for B2B businesses. Below 1:1 means you're losing money on every customer. The gold standard is 3:1—you generate $3 in value for every $1 spent acquiring. This ratio determines whether you can scale profitably or are just accelerating toward failure. LTV also shifts focus from transactions to relationships. When you understand that a customer's value compounds over time through renewals, expansions, and referrals, you invest in customer success and retention—not just acquisition.
3:1
ideal LTV to CAC ratio
5-25x
cheaper to retain vs acquire customers
67%
of SaaS revenue from existing customers
How LTV Works
Calculate average revenue per customer
Determine your average contract value (ACV) or average revenue per account (ARPA). For subscription businesses, this is typically annual recurring revenue per customer.
Determine customer lifespan
Calculate how long customers stay on average. If monthly churn is 2%, average lifespan is 1/0.02 = 50 months. Use actual cohort data when available.
Factor in expansion revenue
Include upsells, cross-sells, and price increases that grow accounts over time. Fast-growing accounts have much higher LTV than flat ones.
Apply gross margin
LTV should reflect profit, not just revenue. Multiply by gross margin to get true economic value: LTV = (ARPA × Gross Margin × Lifespan).
Segment for accuracy
Calculate LTV by customer segment—enterprise customers typically have different LTV than SMB. Aggregate LTV hides important variation.
Compare to CAC
Divide LTV by CAC to get your ratio. Track this metric over time and by segment to ensure sustainable unit economics.
Best Practices
Calculate LTV by segment—enterprise and SMB have fundamentally different economics
Use gross margin LTV, not revenue LTV, for accurate unit economics
Track LTV trends over time—increasing LTV signals improving product-market fit
Include expansion revenue—it's a major LTV driver in B2B SaaS
Use cohort analysis for more accurate lifespan estimates
Update LTV calculations quarterly as retention data improves
Set LTV:CAC targets by channel—some channels justify higher CAC
Use LTV to inform pricing strategy—underpriced products have unnecessarily low LTV
Common Mistakes
- • Using revenue instead of gross profit—this overstates LTV significantly
- • Not segmenting LTV—averaging across very different customer types is misleading
- • Ignoring expansion revenue—in SaaS, net revenue retention can exceed 100%
- • Using assumptions instead of actual retention data when available
- • Not accounting for customer support and success costs in margin
- • Comparing LTV across companies without normalizing for business model differences
- • Setting LTV:CAC targets without considering payback period and cash constraints
Related Terms
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