What is LTV (Lifetime Value)?
Lifetime Value (LTV) estimates the total economic value a single customer contributes to your business over the full duration of the relationship. It ties together monetization (ARPU or AOV), unit margins, and retention so you can judge whether your growth engine is creating or destroying value.
In corporate finance and unit economics, LTV is a core input to LTV:CAC, payback period, and decisions about how aggressively to invest in sales, marketing, and product.
Formula
For a contribution-margin view of LTV across a stable customer base:
Where:
- ARPU = average recurring revenue per user per period (e.g., per month)
- Gross Margin = (Revenue − COGS) ÷ Revenue
- Customer Lifetime = average tenure in that period count (e.g., months or years)
This yields lifetime gross profit per customer, which can be compared directly to CAC and used to compute LTV:CAC and surplus over CAC.
Example
Assume a SaaS product with:
- Monthly ARPU = $30
- Gross Margin = 75%
- Average Customer Lifetime = 24 months
- CAC per customer = $150
Step 1 – Convert ARPU to monthly contribution:
- Monthly contribution per customer = $30 × 75% = $22.50
Step 2 – Compute Lifetime Value:
- So each customer is expected to generate \$540 in lifetime gross profit.
Step 3 – Compare to CAC:
- LTV:CAC = $540 ÷ $150 = 3.6x
- Surplus over CAC = $540 − $150 = $390
In unit economics terms, this profile sits in the “excellent” zone: each dollar of acquisition spend creates $3.60 of gross profit over the customer’s lifetime, leaving meaningful room for overhead and reinvestment while still compounding equity value.