What is LTV (Lifetime Value)?
Customer Lifetime Value (LTV or CLV) measures the total revenue a business can expect from a single customer account throughout the entire relationship. It accounts for the initial purchase plus all subsequent revenue: renewals, upsells, cross-sells, and expansion minus the costs of serving that customer.
For subscription businesses, LTV is calculated as: (Average Revenue Per Customer x Gross Margin) / Customer Churn Rate. This formula reveals why retention is so powerful small improvements in churn dramatically increase lifetime value.
Why It Matters
LTV determines how much you can afford to spend acquiring customers. If LTV is $5,000 and CAC is $500, you have a healthy 10:1 ratio and room to scale. If LTV is $500 and CAC is $400, you're burning cash on every new customer and the model is unsustainable.
LTV also guides customer segmentation and service tiers. High-LTV customers justify premium support, onboarding, and success resources. Low-LTV customers require efficient, self-service models to maintain profitability.
Benchmarks
- SaaS LTV ranges: $1K-$5K for SMB, $10K-$50K for mid-market, $100K+ for enterprise
- LTV:CAC target: 3:1 is considered healthy; below 3:1 indicates problems
- Churn impact: Reducing churn from 5% to 4% can increase LTV by 25%
- Time to recover LTV: Best-in-class companies recover CAC within 12 months; LTV captures value over years
Best Practices
1. Calculate by segment, not just average - Average LTV across all customers hides important differences. Calculate LTV by acquisition channel, industry, company size, and plan tier to guide strategic decisions.
2. Use cohort analysis - Track LTV for groups of customers acquired in the same period. This reveals whether newer cohorts are more or less valuable than historical ones, forecasting future LTV trends.
3. Factor in gross margin - Revenue LTV overstates value if costs are high. Always use gross margin in calculations to reflect true economic value.
4. Track leading indicators - Product usage, engagement, and satisfaction scores predict future LTV. Monitor these metrics to intervene before high-value customers churn.
5. Increase LTV through expansion - The fastest way to increase LTV isn't extending retention (though that matters) but driving expansion revenue through upsells and cross-sells.
Common Mistakes
- Using revenue rather than gross margin, overstating true value
- Calculating only across all customers, missing segment differences
- Ignoring the time value of money (a dollar today is worth more than a dollar in five years)
- Treating LTV as static rather than tracking trends over time
- Not accounting for customer acquisition cost when interpreting LTV figures
Key Takeaways
- LTV determines sustainable customer acquisition spend
- Gross margin matters more than revenue in LTV calculations
- Cohort analysis reveals LTV trends before they impact financials
- Small churn improvements create dramatic LTV increases
- LTV:CAC ratio of 3:1 is the minimum threshold for healthy economics
