What is LTV (Lifetime Value)?
LTV (Lifetime Value) is a crucial predictive metric representing the total amount of revenue a company reasonably expects to earn from a single customer throughout the entire duration of their business relationship.
LTV is not just for SaaS; it applies to any subscription or repeat purchase model (like e-commerce). A high LTV proves that your product is sticky and that your customers are loyal.
The Simple Formula While LTV can be mathematically complex (involving discounts and churn rates), a simple way to calculate it is:
Average Monthly Revenue per User (ARPU) × Average Customer Lifespan (in months) = LTV
The LTV:CAC Golden Rule LTV is never viewed alone—it must always be compared to your Customer Acquisition Cost (CAC). This ratio is the ultimate determinant of business health:
- LTV:CAC must be greater than 1:1. If you spend more to acquire a customer than you expect to earn from them, your company is losing money on every sale.
- The Industry Gold Standard is 3:1. An LTV that is three times higher than your CAC proves your business model is sustainable, scalable, and highly attractive to investors.
If your LTV is low, you either need to raise your price, improve customer retention (reduce churn), or find new ways to upsell.
Key Takeaway: LTV is the key to justifying your spending. A high LTV allows you to spend more aggressively on marketing and sales to dominate your market.
