What is LTV (Customer Lifetime Value)?
The total revenue a business expects to earn from a single customer account over the entire duration of that relationship.
Customer Lifetime Value (LTV) is the total revenue a business expects to earn from a single customer account over the entire duration of their relationship. It is the single most important unit economics metric for subscription businesses because it determines how much you can afford to spend acquiring a customer while remaining profitable. LTV is most commonly calculated as Average Revenue Per User divided by Monthly Churn Rate for SaaS businesses.
Formula
LTV = ARPU / Monthly Churn RateARPU 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.
Industry Benchmarks
- SaaS SMB segment: $1,000 to $5,000 LTV is typical
- SaaS Mid-Market: $5,000 to $25,000 LTV
- SaaS Enterprise: $25,000 and above
- LTV:CAC ratio of 3:1 or higher is considered healthy
- LTV:CAC below 1:1 means you lose money on every customer
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
- Using gross revenue instead of gross margin in the formula, which overstates true profitability
- 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
- Segment LTV by acquisition channel, plan tier, and industry to find your highest-value customer profiles
- Track LTV:CAC payback period alongside the ratio itself - a 3:1 ratio with a 36-month payback is not healthy
- Model expansion revenue separately: upsell and cross-sell can significantly increase LTV beyond the base subscription
Related Terms
Free LTV Calculator
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