What is Customer Lifetime Value (LTV)?
Customer Lifetime Value is the total revenue a business can expect from a single customer over their entire relationship. It represents the upper limit of what you should spend to acquire a customer (CAC). LTV is the most important metric for subscription businesses because it determines whether your growth is profitable or just delaying inevitable losses.
The Formula
LTV = Average Revenue Per User (ARPU) × Gross Margin % × Average Customer Lifespan Or: LTV = ARPU × Gross Margin % ÷ Monthly Churn Rate
Use gross-margin-adjusted LTV for a more accurate picture, as it accounts for the cost of serving each customer.
Worked Example
A SaaS product charges $99/month with 75% gross margins and experiences 4% monthly churn.
- ARPU = $99/month
- Average lifespan = 1 ÷ 0.04 = 25 months
- Revenue LTV = $99 × 25 = $2,475
- Margin-adjusted LTV = $2,475 × 0.75 = $1,856
📌 Each customer is worth $1,856 in gross profit over their lifetime. If CAC is $600, the LTV:CAC ratio is 3.1:1, right at the healthy threshold.
Why This Matters
Maximum CAC calculation
LTV sets the ceiling for acquisition spend. With a $1,856 LTV, you can afford up to ~$620 CAC (3:1 ratio) and still have a viable business. Spend more and you're losing money per customer.
Customer segmentation
Calculating LTV by segment reveals which customers are most valuable. Enterprise customers with $15K LTV deserve a dedicated sales team; $500 LTV SMBs need self-serve onboarding.
Product investment decisions
Features that increase retention by even 1% can dramatically increase LTV. A 1% churn reduction from 5% to 4% increases average lifespan from 20 to 25 months, a 25% LTV increase.
Common Mistakes
❌ Using revenue LTV instead of margin-adjusted
Revenue LTV overstates customer value by ignoring delivery costs. A $100/month customer with 40% margins is only worth $40/month in contribution.
❌ Not accounting for expansion revenue
Many SaaS customers upgrade over time. Ignoring upsells and cross-sells underestimates LTV by 20-40% for companies with good expansion motions.
❌ Using overall average churn
Customer cohorts churn at different rates. Early-stage customers churn faster; long-tenured customers rarely leave. Using blended churn distorts LTV calculations.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| B2B SaaS (SMB) | $3,000+ | $1,000-3,000 | Below $500 |
| B2B SaaS (Enterprise) | $50,000+ | $15,000-50,000 | Below $10,000 |
| B2C Subscription | $500+ | $150-500 | Below $100 |
Source: ProfitWell Subscription Benchmarks
Benchmark data sourced from ProfitWell Subscription Benchmarks.