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metrics

LTV (Lifetime Value)

Total value generated by a customer over their entire lifecycle.

LTV (Lifetime Value), or Customer Lifetime Value, represents the total revenue a customer generates during their entire relationship with your company. It's one of the most important metrics for a SaaS because it helps evaluate the profitability of your acquisition efforts and determine how much you can invest to acquire new customers.

Formula

LTV = ARPU × Gross Margin / Churn Rate

LTV is calculated by multiplying the average revenue per user (ARPU) by the gross margin, then dividing by the monthly churn rate. This formula assumes constant churn over time.

Concrete Example

A B2B SaaS with $100/month ARPU, 80% gross margin and 2% monthly churn.

LTV = $100 × 0.80 / 0.02 = $4,000

Each customer generates an average of $4,000 over their lifetime.

SaaS Benchmarks

< $500Low - Improve retention
$500 - $2,000Fair - Room for optimization
$2,000 - $10,000Good - Solid foundation
> $10,000Excellent - Highly profitable customers

Tips

  • Reducing churn by 1% can increase LTV by 30-40%
  • Segment your customers by LTV to prioritize support
  • Upselling increases LTV without acquisition costs
  • Good onboarding significantly improves LTV

Common Mistakes

  • Using gross revenue instead of gross margin
  • Ignoring customer service costs in calculation
  • Not segmenting LTV by cohort or channel

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Related Terms

CACLTV CAC RATIOCHURN RATEARPUNRR

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