LTV
Customer Lifetime Value
The total gross profit you expect from a customer over their entire relationship with you. It's the 'how much can we afford to spend to acquire them' number, but only if you calculate it on margin, not revenue.
Your ARPU is $1,000/month, gross margin is 80%, and monthly revenue churn is 2%. LTV = ($1,000 × 0.80) ÷ 0.02 = $40,000. If your CAC is $12,000, your LTV:CAC is 3.3:1. Healthy territory. But if you used revenue instead of margin, you'd think LTV was $50k and overestimate what you can spend to acquire.
LTV is the metric everyone quotes and almost nobody calculates correctly. The classic mistake: using revenue instead of gross margin. If your LTV is $100k but your gross margin is 70%, your real LTV is $70k. That changes what you can afford to spend on CAC.
The second mistake: ignoring expansion. If customers typically grow 20% per year, your simple "ARPU ÷ churn" formula is understating LTV. Use revenue churn (not logo churn) to capture expansion and contraction.
Investors care about LTV:CAC ratio (3:1 is the classic target) and CAC payback (how many months to recover your investment). Both require honest LTV to mean anything.
Define ItOther Definitions
“The expected gross profit from a customer over their lifetime, calculated as ARPA × Gross Margin % ÷ Revenue Churn Rate. Captures both margin and expansion/contraction dynamics.”
“Total value a customer generates over their relationship, used with CAC to calculate LTV:CAC ratio. The core unit economics metric for SaaS investment decisions.”
“The sum of expected gross profit from a customer account over its entire relationship, distinct from CAC which measures cost to acquire that value.”
“Customer lifetime value incorporating gross margin and revenue churn to reflect both profitability and the impact of expansion/contraction on long-term value.”
The simple formula: ARPU × Average Customer Lifetime. The investor-grade formula: ARPU × Gross Margin % ÷ Revenue Churn Rate.
SaaS Academy and Userpilot emphasize the margin-adjusted version. Without it, you're overstating what customers are actually worth. The SaaS CFO separates LTV from CAC (some definitions subtract CAC from LTV, but the standard is to keep them separate and use the ratio).
The key insight: use revenue churn, not logo churn. If you have 5% logo churn but customers who stay are expanding 10%, your revenue churn is actually -5% (negative churn). That dramatically increases LTV compared to the simple logo-based calculation.
MistakesCommon Mistakes
Using revenue instead of gross margin (overstates LTV significantly)
Mixing time units (monthly churn with annual ARPU)
Using logo churn instead of revenue churn (ignores expansion/contraction)
Averaging across very different customer cohorts or segments
Subtracting CAC from LTV instead of using LTV:CAC ratio separately
LTV:CAC ratio not where it should be?
The fix isn't always 'spend less on acquisition.' Sometimes it's fixing the churn that's dragging LTV down. We find the real problem.
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