Customer Lifetime Value
Customer lifetime value (LTV or CLV) is the total revenue a business can expect from a single customer account throughout their entire relationship, from first purchase to last.
Customer Lifetime Value predicts the total net profit from the entire future relationship with a customer. A simple formula is: Average Purchase Value × Purchase Frequency × Customer Lifespan = LTV. A customer who spends $50 per month for an average of 24 months has an LTV of $1,200.
SaaS companies often use Monthly Recurring Revenue ÷ Monthly Churn Rate as a quick LTV estimate. LTV varies significantly across customer segments. Enterprise customers might have 10x the LTV of small business customers.
In practice
- A SaaS company calculated their LTV was $8,400 (average 28-month retention × $300/month) with a $1,200 CAC, their 7:1 ratio made them extremely attractive to investors
- An e-commerce brand discovered their repeat customers had 5x the LTV of one-time buyers, they invested in a loyalty program that increased repeat purchase rates by 30%
- A gym calculated average member LTV of $1,400 (14-month average membership × $100/month), justifying their aggressive $250 acquisition spend on signup promotions
- A B2B software company segmented LTV by customer size and found enterprise customers had $50K LTV vs $5K for SMB, they restructured their sales team to focus on enterprise acquisition
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