LTV (Lifetime Value)
LTV is the total revenue you expect from a customer over their entire relationship with your business. It's the north star for determining how much you can afford to spend on acquisition.
What is LTV (Lifetime Value)? How to Calculate & Grow
Simple LTV formula: LTV = (Average Revenue Per Customer Per Month) × (Average Customer Lifespan in Months)
Better formula accounting for churn: LTV = (ARPU / Churn Rate)
Example: If customers pay $100/month on average and churn rate is 5% monthly, LTV = $100 / 0.05 = $2,000. This customer will generate $2,000 before they leave.
LTV:CAC ratio: The golden metric for sustainable growth. Target at least 3:1. If LTV is $2,000 and CAC is $300, your ratio is 6.67:1—excellent. If LTV:CAC is 1.5:1, you're barely profitable and can't scale profitably.
Why LTV matters: It tells you the maximum you can spend on acquisition while staying profitable. If LTV is $2,000 and you want a 3:1 ratio, you can spend up to $666 on CAC. Spend more, you destroy value.
Increasing LTV: (1) Reduce churn through better onboarding and engagement, (2) Upsell and cross-sell to increase ARPU, (3) Annual plans (higher upfront payment, better retention), (4) Build switching costs (integrations, data lock-in—use ethically).
Common mistakes: (1) Calculating LTV from short time periods (your 3-month-old startup doesn't have enough data), (2) Ignoring cohorts—early adopters may have wildly different LTV than later customers, (3) Using raw ARPU instead of gross-margin-adjusted revenue. You do not keep 100% of what a customer pays, so multiply by gross margin or LTV overstates what the customer is actually worth.
Examples
Enterprise SaaS with $50k annual contracts and 95% annual retention can have LTV over $500k. Consumer apps with $5/month subs and 40% annual retention might have LTV under $15. Know your numbers.