LTV (Lifetime Value)

Lifetime Value (LTV, also called Customer Lifetime Value or CLV) estimates the total revenue a single customer will generate from the time they sign up until the time they churn. It's a forward-looking metric that helps you understand the long-term value of each customer relationship and, critically, how much you can afford to spend acquiring new customers.

The simplest LTV formula for SaaS is: LTV = Average Revenue Per Account (ARPA) / Monthly Churn Rate. If your average customer pays $100/month and your monthly churn rate is 2%, LTV = $100 / 0.02 = $5,000. More sophisticated models account for expansion revenue, gross margin, and discount rates, but the simple formula is a good starting point.

LTV is inherently an estimate — it's based on current churn rates and ARPA projections, both of which change over time. Early-stage startups often have unreliable LTV calculations because they don't have enough data to predict long-term churn patterns. A common mistake is using an optimistic churn rate ("our churn will improve") to calculate an inflated LTV. Use your actual churn data, and update the calculation regularly as your cohort data matures. Investors prefer to see LTV based on real cohort performance, not aspirational projections.

LTV is one half of the most important equation in SaaS: LTV:CAC ratio. It tells you the ceiling on what you can profitably spend to acquire a customer. If your LTV is $5,000, spending $3,000 to acquire a customer might be viable (depending on payback period). If your LTV is $500, that same $3,000 acquisition cost is a business-ending mistake. LTV also helps you segment your customer base: high-LTV customer profiles are worth investing more to acquire and retain; low-LTV segments might not be worth pursuing.