What is Lifetime Value (LTV)?
Lifetime Value is the total revenue a company expects to earn from a single customer over the entire duration of their relationship.
Lifetime Value is the total revenue a company expects to earn from a single customer over the entire duration of their relationship. It's the fundamental metric for understanding customer value and justifying acquisition spend.
Simple LTV = Average Revenue Per Account (ARPA) × Average Customer Lifetime
For SaaS: LTV = ARPA ÷ Monthly Churn Rate (for monthly metrics) or ARPA × (1 ÷ Annual Churn Rate) for annual metrics.
More sophisticated LTV calculations account for expansion revenue, variable margins, and discount rates. A customer who starts at $500/month but expands to $2,000/month over 3 years has a very different LTV than one who stays at $500/month.
The LTV:CAC ratio is the most important unit economics metric in SaaS. A ratio of 3:1 means every dollar spent acquiring a customer generates $3 in lifetime revenue. Below 1:1 means you're losing money on every customer.
Why It Matters
LTV determines the maximum you can spend to acquire a customer (CAC ceiling), the segments worth targeting, and whether your business model works at scale. LTV:CAC ratio is the #1 unit economics metric investors evaluate.
Frequently Asked Questions
How do you calculate LTV?
Simple: ARPA ÷ Monthly Churn Rate. More accurate: sum of discounted future revenue accounting for expansion, contraction, and churn over the expected customer lifetime.
What is a good LTV:CAC ratio?
3:1 or higher is the benchmark. Below 1:1 means you lose money on every customer. Between 1:1 and 3:1 is concerning. Above 5:1 may mean you are under-investing in growth.
Related Terms
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Richard Ewing is a Product Economist and AI Capital Auditor. He helps companies translate technical complexity into financial clarity.
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