Financial Glossary
Lifetime Value (LTV) Ratio
Customer Lifetime Value (LTV or CLV) measures the total net revenue a business expects to earn from a single customer account over the entire duration of the relationship. The most common formula is: LTV = Average Revenue Per Period multiplied by Gross Margin multiplied by Average Customer Lifespan. In subscription businesses, lifespan is often estimated as 1 divided by the churn rate. LTV is most analytically powerful when compared to Customer Acquisition Cost (CAC): an LTV/CAC ratio above 3:1 is generally considered a signal of a healthy, scalable business model.
Problem & Application
A campground reservation SaaS charges parks $200 per month. Average gross margin is 70% and annual churn is 15%, implying an average lifespan of roughly 6.7 years. LTV = $200 x 12 months x 0.70 x 6.7 years = approximately $11,200 per customer. If the company spends $2,800 in sales and marketing to acquire each park (CAC), the LTV/CAC ratio is 4.0 -- within the healthy range. If churn worsens to 25% (lifespan drops to 4 years) and LTV falls to $6,720, the same $2,800 CAC now produces a ratio of 2.4, a warning signal that unit economics are deteriorating faster than revenue growth makes visible. Tracking LTV/CAC quarterly lets the CFO identify the problem before it shows up in aggregate financials.
In Short
The LTV ratio is a crucial metric for evaluating the return on investment from customer acquisition efforts.