Definition of Customer Lifetime Value (CLTV / LTV)
Customer Lifetime Value (CLTV), often shortened to LTV, is the total revenue or profit a business can expect to earn from a customer over the entire duration of their relationship. It is a predictive metric that estimates how valuable a customer is from the moment they are acquired until they stop doing business with the company.
What LTV Measures
LTV captures the long-term economic value of a customer rather than focusing on short-term revenue like monthly or annual payments. It helps businesses understand how much each customer is worth over time, factoring in retention, pricing, and margins.
Common LTV Calculation in Subscription Businesses
In subscription models, a common formula for LTV is:
Average Revenue Per Account (ARPA) × Gross Margin ÷ Churn Rate.
Another simplified method is multiplying the average monthly revenue by the average customer lifespan and adjusting for gross margin.
Example of LTV
If a customer pays $100 per month, stays for 36 months on average, and the business operates at an 80% gross margin, the LTV would be $2,880. This represents the gross profit expected from that customer over their lifetime.
LTV Explained for a General Audience
For a general audience, LTV answers a simple question: how much money will this customer generate before they leave? Businesses use this to decide how much they can afford to spend on acquiring and supporting customers. If acquiring a customer costs more than their lifetime value, the business loses money.
Why LTV Matters
LTV is critical for evaluating business sustainability and growth efficiency. It helps companies balance customer acquisition costs, pricing strategy, and retention efforts. Increasing LTV usually means customers stay longer, spend more, or cost less to serve.
LTV and Customer Retention
Retention has a major impact on LTV. Even small improvements in churn can significantly increase lifetime value, which is why companies invest heavily in customer success, support, onboarding, and product quality.
Revenue LTV vs. Gross Margin LTV
Some companies calculate LTV using revenue, while others use gross profit. Gross margin–based LTV is more accurate because it reflects the actual economic value after accounting for the cost of serving customers.
LTV and CAC Relationship
LTV is often evaluated alongside Customer Acquisition Cost (CAC). A common benchmark in SaaS is an LTV-to-CAC ratio of 3:1 or higher, meaning the lifetime value of a customer is at least three times the cost to acquire them.
LTV and Customer Segmentation
LTV helps guide go-to-market and operational strategy. High-LTV customers may justify high-touch sales and support, while low-LTV customers require automated, lower-cost approaches to remain profitable.
LTV in a SaaS and Financing Context
In SaaS, LTV reflects the combined effects of product-market fit, pricing, retention, and expansion. Solutions that reduce churn, improve renewals, or make payments more flexible can indirectly increase LTV by extending customer lifespans and improving satisfaction.
Why LTV Is a Core Business Metric
LTV consolidates multiple aspects of business performance into a single number. A high LTV indicates strong customer relationships, predictable revenue, and long-term growth potential.
Summary
Customer Lifetime Value (LTV) measures the total economic value of a customer over the full length of their relationship with a business. It is a foundational metric for pricing, marketing spend, retention strategy, and long-term planning. High LTV is a hallmark of durable, scalable business models, especially in subscription and SaaS companies.
