Calculate Customer Lifetime Value

Customer Lifetime Value (CLV or LTV) is a metric that estimates the total revenue a business can expect from a single customer account throughout their entire relationship. It considers the customer's revenue contribution, the gross margin on that revenue, and the expected duration of the relationship based on churn. LTV is one of the most important metrics in SaaS and subscription businesses because it directly informs how much you can spend to acquire customers.

The LTV:CAC ratio compares the lifetime value of a customer to the cost of acquiring that customer. A ratio below 1:1 means you lose money on every customer. Between 1:1 and 3:1, the business model may be unsustainable long-term. A ratio of 3:1 to 5:1 is considered healthy; you earn three to five dollars for every dollar spent on acquisition. Above 5:1 suggests you could invest more aggressively in growth. Most venture-backed SaaS companies target a 3:1 ratio as minimum.

Churn rate is the most powerful lever for increasing LTV. Reducing monthly churn from 5% to 3% increases average customer lifespan from 20 months to 33 months; a 65% improvement. Strategies for reducing churn include improving onboarding, building habit loops, providing proactive customer success, fixing bugs quickly, and adding features that increase switching costs. Even small percentage point improvements in churn can double or triple your customer lifetime value.

LTV should guide your marketing budget, pricing strategy, and product roadmap. If your LTV is high relative to CAC, you can afford to spend more on acquisition channels that have longer payback periods but higher quality customers. If your payback period exceeds 12 months, consider whether you have enough cash runway to support growth. Use LTV by segment; calculate it separately for different customer tiers, acquisition channels, and cohorts to identify your most valuable customer profiles.