Definition: Metric estimating the total revenue a customer generates throughout their entire relationship with the business, key for determining acquisition investment.
— Source: NERVICO, Product Development Consultancy
What is LTV
LTV (Lifetime Value), also known as CLV (Customer Lifetime Value), is the metric that estimates the total net revenue a customer generates throughout their entire relationship with the business. For a SaaS business, it is calculated by multiplying the average monthly revenue per customer (ARPU) by the average customer lifetime in months. If a customer pays 100 euros per month and stays an average of 24 months, their LTV is 2,400 euros.
How it works
The basic formula is: LTV = ARPU x (1 / monthly churn rate). For example, with 200 euros ARPU and 5% monthly churn, LTV is 200 x (1/0.05) = 4,000 euros. For more sophisticated calculations, gross margin is considered (LTV = ARPU x gross margin x average customer lifetime), reflecting the real value after deducting the cost of serving the customer. A discount rate can also be applied to calculate the net present value of LTV, which is especially relevant for customers with long contracts.
Why it matters
LTV is fundamental for deciding how much to invest in acquiring customers. The LTV:CAC ratio is the most important efficiency metric for a SaaS business. A high LTV with a low CAC indicates a healthy, scalable business model. If LTV is lower than CAC, the company loses money with every customer it acquires. Improving LTV through better retention, upselling, or price increases is frequently more profitable than reducing CAC.
Practical example
A SaaS product has three customer segments. Startups pay 50 euros per month and have 8% churn (LTV: 625 euros). SMBs pay 200 euros per month with 3% churn (LTV: 6,667 euros). Enterprise customers pay 1,000 euros per month with 1% churn (LTV: 100,000 euros). With a 2,000 euro CAC across all segments, startups are unprofitable (LTV:CAC ratio of 0.3:1), SMBs are profitable (3.3:1), and enterprise is highly profitable (50:1). The team decides to focus acquisition on SMBs and enterprise.