Financial Glossary
Lifetime value (LTV)
Customer Lifetime Value (LTV or CLV) is the total net revenue a business expects to generate from a customer relationship over its entire duration. A common formula for subscription businesses is: LTV equals Average Revenue Per User (ARPU) divided by Customer Churn Rate, where churn rate is the monthly or annual percentage of customers who cancel. A more precise calculation discounts future cash flows to present value and subtracts the cost to serve the customer over the relationship. LTV is most actionable when compared to Customer Acquisition Cost (CAC): the LTV-to-CAC ratio indicates how efficiently the business converts sales and marketing spending into durable customer value.
Problem & Application
A campground management platform charges $200 per month and has an average monthly churn rate of 2%. LTV equals $200 divided by 0.02, or $10,000. If the platform's CAC is $1,500, the LTV-to-CAC ratio is 6.7x, well above the 3x rule-of-thumb for SaaS health. The average customer relationship implied by a 2% monthly churn rate is 50 months (1 divided by 0.02), or just over four years. If the platform can reduce churn to 1.5% through better onboarding and customer success, LTV rises to $13,333, a 33% increase without changing price or acquisition cost. This illustrates why retention investment often generates more value than equivalent spending on new customer acquisition. For businesses with significant cost-to-serve, such as professional services firms, LTV should be calculated net of ongoing service delivery costs, not just gross revenue, to avoid overstating the economic value of the relationship.
In Short
LTV is a vital metric for businesses seeking to increase customer retention and profitability through targeted marketing and customer service strategies.