Customer Lifetime Value (LTV / CLV)
Definition
Customer lifetime value (LTV or CLV) is the total revenue a business expects to earn from a single customer over the entire duration of their relationship. LTV is essential for determining how much a company can afford to spend acquiring customers while maintaining profitability.
Formula
Overview
Customer lifetime value (LTV) estimates the total revenue one customer will generate before they churn. It is the counterpart to customer acquisition cost (CAC); together they form the most fundamental unit economics equation in subscription businesses.
The simplest LTV formula divides ARPU by churn rate. More sophisticated models multiply ARPU by gross margin before dividing by churn, yielding a gross-margin-adjusted LTV that better represents actual profit contribution. Some companies also apply a discount rate to account for the time value of money.
LTV should always be analyzed in context. A high LTV is meaningless if it takes too long to realize; this is why the CAC payback period is an important companion metric. Most investors expect LTV to be at least 3× CAC for a healthy SaaS business, with the payback period under 12 to 18 months.
Example
ARPU of $100/month with a 5 % monthly churn rate yields LTV = $100 ÷ 0.05 = $2,000 per customer.
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