Glossary · Metrics · Updated
LTV, or lifetime value, is the total gross margin a customer generates over their whole life as a customer. Divided by acquisition cost it gives the LTV/CAC ratio, which shows whether the business model works: below 3, acquisition costs too much relative to what it returns.
LTV is computed on gross margin, not revenue. A €500 per month subscription at 80% margin returns €400 a month, not €500. Using revenue mechanically inflates the ratio and misrepresents how profitable the model really is.
Average customer lifetime follows from churn: it is the inverse of the monthly churn rate. Two percent monthly churn means fifty months of lifetime, five percent means twenty. That is why LTV is extremely sensitive to churn, far more than to price.
The LTV/CAC ratio works as a quick test. Below 1 you lose money on every customer won. Between 1 and 3 the model works but leaves little room to fund growth. Above 3 it is solid, and a ratio well above 5 often means you could be spending more on acquisition.
Example: LTV and its sensitivity to churn
The same B2B SaaS, with a measured €3,000 CAC and a €500 monthly subscription.
| Monthly revenue per customer | €500 |
|---|---|
| Gross margin | 80%, or €400/month |
| Monthly churn | 2% |
| Average lifetime | 1 / 0.02 = 50 months |
| LTV | €400 × 50 = €20,000 |
| CAC | €3,000 |
| LTV/CAC ratio | 6.7 |
| Common threshold | 3 |
| If churn rises to 5% | lifetime 20 months, LTV €8,000, ratio 2.7 |
Three extra points of churn move the ratio from 6.7 to 2.7, below the threshold. Neither price nor CAC changed: retention alone destroyed the model's economics.
The common mistake
Computing LTV on revenue rather than gross margin, over a lifetime never actually observed. At an eighteen-month-old company, a fifty-month lifetime is an extrapolation, not a measurement: present it as one.
Frequently asked questions
How do you calculate LTV?+
LTV = monthly gross margin per customer multiplied by average lifetime, where lifetime is the inverse of monthly churn. With €400 of monthly margin and 2% churn, lifetime is 50 months and LTV is €20,000.
What LTV/CAC ratio should you aim for?+
Three is the usual benchmark. Below it, acquisition costs too much for what it returns. Well above five, the model is healthy but you are probably underinvesting in acquisition and leaving market share to a competitor.
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