SaaS EconomicsLTV

What is LTV (Customer Lifetime Value)?

Customer Lifetime Value (LTV) is the total revenue a business expects to earn from a single customer account over the duration of their relationship. In subscription businesses, it helps assess how much can be spent acquiring a customer while maintaining viable unit economics. A common SaaS estimate divides Average Revenue Per User by monthly churn rate.

Formula

LTV = ARPU / Monthly Churn Rate

ARPU is Average Revenue Per User per month. Monthly Churn Rate is expressed as a decimal (e.g. 2% = 0.02). Example: ARPU = $150, Churn = 2% monthly, LTV = $150 / 0.02 = $7,500. For a margin-adjusted view: LTV = (ARPU x Gross Margin %) / Churn Rate.

Benchmarks and interpretation

  • Bessemer Venture Partners uses a gross-margin-adjusted LTV:CAC reference of 3:1 or higher in its cloud-company guidance; it is not a market median or universal cutoff
  • LTV:CAC below 1:1 means the chosen LTV estimate is below acquisition cost; review both calculations and omitted costs
  • Compare LTV only when the customer segment, period, churn method, and gross-margin treatment match

When to use LTV

  • Setting maximum CAC thresholds for paid acquisition channels
  • Evaluating unit economics for investor presentations and fundraising
  • Segmenting customers by LTV to prioritise retention efforts
  • Modelling the impact of churn reduction on long-term revenue
Common mistakes
  • Treating revenue-based LTV as profit without accounting for the cost of serving customers
  • Mixing time units - LTV = ARPA / Churn requires both values to use the same period (monthly or annual)
  • Applying a single LTV number to all segments when enterprise and SMB customers have very different lifetimes
Practical tips
  • Segment LTV by acquisition channel, plan tier, and industry to find your highest-value customer profiles
  • Track CAC payback period alongside the LTV:CAC ratio; a ratio alone does not show when acquisition cash is recovered
  • Model expansion revenue separately: upsell and cross-sell can significantly increase LTV beyond the base subscription

Related terms

CAC- Customer Acquisition CostChurn RateMRR- Monthly Recurring RevenueARR- Annual Recurring Revenue

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