Back to Knowledge

LTV (Lifetime Value)

Metric
ROIRevenue

Definition

Total profit you expect to earn from a customer over the entire time they stay with company

Related Knowledge

Customer Acquisition Cost (CAC)
LTV=Average Revenue Per User (ARPU)×Customer LifespanLTV = \text{Average Revenue Per User (ARPU)} \times \text{Customer Lifespan}

In SaaS or subscription contexts, LTV is often simplified as:

LTV=ARPUChurn RateLTV = \frac{ARPU}{\text{Churn Rate}}

Why LTV:CAC Matters

The ratio LTV:CAC (Customer Acquisition Cost) is one of the most important health metrics for a growth model:

  • LTV:CAC < 1 → You lose money on every customer.
  • LTV:CAC ≈ 3 → Healthy. You make about $3 for every $1 you spend.
  • LTV:CAC > 5 → You are likely growing too slowly. There is room to spend more on acquisition.

    • Common LTV Variations

  • Predictive LTV
    • Uses statistical or machine learning models
    • Forecasts future value based on early behavior signals
  • Historical LTV
    • Based on actual past revenue from customers
    • Useful as a reality check for predictive models
  • Cohort-based LTV
    • Tracks LTV for different customer segments (e.g. plan, channel, geography)
    • More accurate, since not all customers behave the same way

    • Example: LTV and Payback Period

    Scenario

    You analyze the last 6 months:

  • "Enterprise" customers (higher ARPU) have an 18‑month Payback Period.
  • "Solopreneurs" have a 2‑month Payback Period.

    • Interpretation

  • Enterprise customers take longer to pay back acquisition cost, but their LTV is 10x higher.
  • Solopreneurs pay back fast, but their total LTV is much lower.

    • Possible Action

    "We have enough cash in the bank now. We should pivot strategy to target Enterprise users. Yes, it takes longer to get our money back, but their LTV is 10x higher."