Definition
LTV, customer lifetime value, is the total profit a company expects to earn from a customer over the entire time they remain a customer. The standard SaaS formula in words is average revenue per customer per period, multiplied by gross margin, divided by the churn rate for that period. A customer paying €100 a month at 80% gross margin, in a business with 2% monthly churn, has an LTV of €4,000. It is the value side of the growth equation; CAC (customer acquisition cost) is the cost side.
In a company, LTV sets the ceiling on what you can afford to spend to win a customer and tells you which segments are worth pursuing. The LTV to CAC ratio is the summary metric: 3 to 1 is the widely used healthy threshold, meaning each customer returns three times what it cost to acquire. Below 1 to 1 the business loses money on every customer; well above 5 to 1 usually means underinvesting in growth. LTV is best calculated by segment, plan and channel rather than as one average.
The misconception is that LTV is a precise figure. It is a projection that depends heavily on the churn estimate, and low churn makes the formula explode: at 0.5% monthly churn the implied lifetime is 200 months, which no rational planner should bank on. Good practice caps the lifetime at 3 to 5 years and uses cohort data rather than blended churn. Investors know this and discount LTV claims built on optimistic churn assumptions.
In practice
A company selling to small businesses had an LTV of €1,500 and a CAC of €1,200, a ratio close to 1 to 1 that left nothing for overheads. Its mid-market segment showed an LTV of €18,000 against a CAC of €4,500. Shifting the sales focus changed the company's economics without changing the product.
Why it matters
LTV tells you what a customer is worth, and therefore what you can afford to pay to win one. Every pricing, marketing and sales decision is implicitly a bet on LTV; making it explicit, by segment, is one of the highest-return exercises a CEO can run.
Frequently asked questions
- How do you calculate customer lifetime value?
- Multiply average revenue per customer per month by gross margin percentage, then divide by monthly churn rate. For example, €100 a month at 80% margin with 2% churn gives €100 x 0.8 / 0.02 = €4,000. For more accuracy, calculate by segment and cap the customer lifetime at 3 to 5 years.
- What is a good LTV to CAC ratio?
- 3 to 1 is the standard healthy benchmark for SaaS, meaning a customer returns three times its acquisition cost. Between 3 and 5 to 1 is considered strong. Below 1 to 1 means you lose money on each customer, and above 5 to 1 often signals you could grow faster by spending more on acquisition.