Customer lifetime value (LTV, also written CLV) is the total revenue you expect to earn from a customer over the entire time they remain a customer. It is one of the most useful numbers in business because it defines how much you can rationally spend to acquire a customer.
The Simple LTV Formula
For a subscription business with relatively stable churn:
LTV = ARPU ÷ Churn rate
Where ARPU is average revenue per user per month and churn rate is the monthly churn rate expressed as a decimal.
Example: a product with $50 ARPU and 4% monthly churn:
LTV = $50 ÷ 0.04 = $1,250
The logic: at 4% monthly churn, the average customer stays for 1 ÷ 0.04 = 25 months, and pays $50 per month, so they generate $1,250 in total revenue over their lifetime.
Gross Margin LTV
Raw revenue LTV overstates the value because it ignores the cost to deliver the service. A more accurate version uses gross margin:
LTV = (ARPU × Gross margin %) ÷ Churn rate
If your gross margin is 70%:
LTV = ($50 × 0.70) ÷ 0.04 = $35 ÷ 0.04 = $875
This is the figure most investors and operators mean when they talk about LTV in a unit economics context.
The LTV:CAC Ratio
LTV means little in isolation. Its primary use is in comparison to customer acquisition cost (CAC):
LTV:CAC ratio = LTV ÷ CAC
General benchmarks:
- Below 1:1: You are losing money on every customer, which is unsustainable
- 1:1 to 3:1: You are covering CAC but growth may be capital-intensive
- 3:1: Often cited as the healthy benchmark for SaaS businesses
- Above 5:1: Healthy, but may indicate you are underinvesting in growth
A 3:1 LTV:CAC ratio means every dollar spent acquiring a customer yields three dollars in gross margin over that customer's lifetime.
CAC Payback Period
A related metric is how many months it takes to recover your acquisition cost:
Payback period = CAC ÷ (ARPU × Gross margin %)
If CAC is $300 and monthly gross profit per customer is $35:
$300 ÷ $35 = approximately 8.6 months
Shorter payback periods mean less capital is tied up in customer acquisition and growth is more cash-efficient.
What Moves LTV
Reduce churn: The single biggest lever. Cutting churn from 4% to 2% doubles average customer lifetime and thus doubles LTV.
Increase ARPU: Upsells, plan upgrades, and add-ons increase the revenue per customer without changing acquisition cost.
Improve gross margin: Better unit economics on delivery (infrastructure, support costs) increase the gross profit contribution of each customer.
Limitations of the Formula
The simple LTV formula assumes constant ARPU and churn, which is rarely true. Customers acquired in different periods, through different channels, or in different segments have materially different retention profiles. Cohort-level LTV analysis (tracking each month's new customers over time) is more accurate than a single blended figure. The formula is useful for quick estimates and benchmarking; cohort analysis is better for strategic decisions.