Lifetime Value (LTV or CLV) is the total revenue a business can expect from a single customer account over the entire duration of their relationship. It measures how much a customer is worth beyond their first purchase, accounting for recurring payments, expansions, and eventual churn. LTV is the ceiling that determines how much you can spend on acquisition.
How It Works
The simplest LTV calculation for subscription businesses is: LTV = Average Revenue Per Account (ARPA) / Monthly Churn Rate. If your average customer pays $100/month and your monthly churn is 5%, the LTV is $100 / 0.05 = $2,000. This means the average customer contributes $2,000 in revenue before churning.
More sophisticated models account for expansion revenue (upgrades, add-ons), gross margin (LTV should reflect profit, not just revenue), and discount rates (money received years from now is worth less today). The gross-margin-adjusted formula is: LTV = (ARPA x Gross Margin %) / Churn Rate.
For non-subscription businesses, LTV uses purchase frequency: LTV = Average Order Value x Purchase Frequency x Average Customer Lifespan.
Why It Matters
The LTV:CAC ratio is the fundamental equation of sustainable growth. A ratio of 3:1 or higher means every dollar of acquisition spending generates three dollars of lifetime revenue, enough to cover operations, R&D, and profit after acquisition costs. Below 1:1, you are paying more to acquire customers than they will ever return.
LTV also drives strategic decisions. High-LTV segments justify premium acquisition spending and white-glove onboarding. Low-LTV segments need automated, low-touch approaches to remain profitable.
In Practice
A project management SaaS has three plans: Starter ($29/month, 8% monthly churn), Professional ($79/month, 4% churn), and Enterprise ($249/month, 1.5% churn). LTVs are $362, $1,975, and $16,600 respectively. This analysis reveals that Enterprise customers are worth 45 times more than Starter customers, justifying dedicated sales staff and extended trial periods for larger accounts.
Pro Tips
Improve LTV through three levers: reduce churn (better onboarding, proactive support), increase ARPA (upselling, usage-based pricing), and lengthen contracts (annual plans with discounts). Track LTV by acquisition channel; customers from organic search often have higher LTV than those from paid ads because they sought you out deliberately.