LTV

Full Definition

Customer Lifetime Value quantifies the total economic value a business can expect to generate from a single customer relationship from acquisition through churn. The simplest formulation divides average annual revenue per customer by the annual churn rate to calculate average customer lifespan, then multiplies by gross margin to convert revenue to profit. More sophisticated models incorporate expansion revenue trajectories, apply a discount rate to reflect the time value of money, and segment by customer cohort to reflect differing retention dynamics across the base. LTV is most meaningfully calculated on a gross profit basis (LTV on gross margin rather than revenue) because this captures the actual economic return on customer acquisition investment, not just the top-line scale. A SaaS business with 70% gross margins and $50,000 annual contract value generating a 5-year average customer lifespan has gross profit LTV of approximately $175,000 per customer. This becomes the numerator in the LTV/CAC ratio, the benchmark investors use to assess go-to-market efficiency. The most common LTV calculation mistake is using simple averages that obscure customer heterogeneity. Enterprise customers often have LTV 10–50x higher than SMB customers due to larger contract values, lower churn, and higher expansion potential. Mixing these cohorts in a single LTV figure creates a misleading blended number that drives poor investment decisions across segments. Best practice builds separate LTV models by customer segment, uses actual cohort survival curves rather than assumed churn rates, and refreshes the analysis quarterly as new retention data accumulates.

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