What Is Customer Lifetime Value (LTV)?
Also known as LTV, CLV, CLTV, Lifetime value
Customer lifetime value (LTV) is an estimate of the total gross profit a company earns from one customer over the full length of the relationship. In SaaS it is usually calculated from average revenue per account, gross margin and churn. It tells you how much you can afford to spend acquiring and keeping a customer.
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Open the toolCustomer Lifetime Value (LTV) explained
LTV answers a simple question: what is a typical customer worth? For subscription businesses the standard approach takes average monthly revenue per account, multiplies it by gross margin to get profit rather than revenue, and divides by monthly churn. Lower churn means a longer expected lifetime, so small churn improvements can push LTV up sharply.
The number matters because it sets the ceiling on acquisition spend. If a customer is worth $20,000 in gross profit, spending $4,000 to win them is healthy. If they are worth $3,000, the same CAC loses money. That is why LTV is almost always paired with CAC in the LTV:CAC ratio, and why investors ask for both.
Treat LTV as an estimate, not a fact. Young companies have little churn history, so the formula can predict lifetimes of ten years or more from a few good months. Many teams cap the lifetime at three to five years, calculate LTV per segment, and include expansion revenue only when they have real data showing customers grow over time.
Customer Lifetime Value (LTV) formula
LTV = (Average monthly revenue per account × Gross margin %) ÷ Monthly churn rate
- Average monthly revenue per account
- Recurring revenue divided by active paying accounts, usually measured as MRR per customer, also called ARPA.
- Gross margin %
- The share of revenue left after cost of goods sold, such as hosting, support and third-party software costs.
- Monthly churn rate
- The percentage of customers who cancel in an average month, written as a decimal in the formula.
Worked example: A customer pays $500 a month, gross margin is 80% and monthly churn is 2%. Gross profit per month is $500 × 0.80 = $400. LTV = $400 ÷ 0.02 = $20,000. The expected lifetime is 1 ÷ 0.02, or 50 months.
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Customer Lifetime Value (LTV) example
A sales engagement tool has two segments. Small teams pay $200 a month with 4% monthly churn and 80% margin, so LTV is $160 ÷ 0.04 = $4,000. Mid-market accounts pay $1,500 a month with 1.5% churn, so LTV is $1,200 ÷ 0.015 = $80,000. The company keeps self-serve for small teams and points its outbound team at mid-market accounts only.
How to calculate customer lifetime value
Find average revenue per account
Divide monthly recurring revenue by the number of active paying accounts. Use a recent three to six month average to smooth out one-off swings.
Apply gross margin
Multiply revenue per account by gross margin so LTV reflects profit. Revenue-based LTV overstates what you can safely spend on acquisition.
Measure monthly churn
Use the share of customers lost per month, ideally averaged over several months. Calculate it separately for each segment if churn differs a lot.
Divide and sanity check
Divide gross profit per month by churn. If the implied lifetime is far longer than your company has existed, cap it at three to five years.
Common mistakes
- Using revenue instead of gross profit, which inflates LTV and makes aggressive acquisition spending look safe when it is not.
- Trusting a lifetime of many years based on only a few months of churn data from early, hand-picked customers.
- Blending all customers into one LTV when small and large accounts have very different revenue and churn patterns.
- Counting hoped-for expansion revenue in LTV before there is real evidence that customers actually upgrade.
Customer Lifetime Value (LTV) FAQ
LTV has no fixed target because it depends on price point. What matters is LTV relative to CAC. A widely used rule of thumb is an LTV:CAC ratio of about 3:1, meaning each customer returns roughly three times what it cost to acquire them in gross profit.
None in practice. LTV, CLV and CLTV are different abbreviations for customer lifetime value. SaaS teams tend to say LTV, while ecommerce and retail teams more often say CLV. Check whether a given figure uses revenue or gross profit, because that changes the number far more than the label.
It can, once you have enough history to show existing customers reliably upgrade or add seats. A simple approach is to use net revenue churn instead of customer churn. Until expansion is proven, leave it out so you do not justify acquisition spend with revenue that may never arrive.
Churn has an outsized effect because expected lifetime is roughly one divided by the churn rate. Cutting monthly churn from 4% to 2% doubles expected lifetime from 25 to 50 months, which doubles LTV with no change in price or margin.