Business Strategy
Definition
Customer Lifetime Value (LTV) is the total revenue a business can expect from a single customer over the entire duration of their relationship — a fundamental input into unit economics and acquisition strategy.
LTV is most commonly calculated as (Average Revenue Per User × Gross Margin) ÷ Churn Rate. For a SaaS business charging $100/month with 80% gross margin and 5% monthly churn, LTV ≈ $1,600. LTV models can be more sophisticated, incorporating expansion revenue, referral value, and customer cohort analysis. The LTV:CAC ratio is the core measure of acquisition efficiency — if LTV is $1,600 and CAC is $400, the ratio is 4:1, generally considered healthy. Improving LTV is accomplished through reducing churn, increasing average contract value through upsells, and lengthening customer relationships.
LTV is the denominator that makes CAC make sense. A company spending $1,000 to acquire a customer with $500 LTV is destroying value with each acquisition; one with $5,000 LTV can profitably spend much more to acquire. Understanding and improving LTV is one of the highest-leverage growth levers available. A finance advisor or marketing consultant can help you model LTV by cohort, segment, and channel.