The total recurring revenue (or gross profit) you expect to earn from an average customer over their entire relationship with you.
LTV = ARPU ÷ customer churn rate (or, margin-adjusted: LTV = (ARPU × gross margin %) ÷ churn rate)
ARPU of £60/mo, 5% monthly churn, 80% gross margin.
Revenue LTV = £60 ÷ 0.05 = £1,200; Margin-adjusted LTV = (£60 × 0.80) ÷ 0.05 = £960
LTV estimates how much an average customer is worth across their full lifetime. The simplest form divides average revenue per user by your churn rate: a lower churn rate means customers stay longer, so each one is worth more.
A more rigorous version multiplies by gross margin, because revenue you cannot keep after cost of service is not really value. LTV based on gross profit is the version you should use when comparing against acquisition cost.
LTV is an estimate, not a guarantee. It assumes churn and revenue stay roughly constant, so it is most reliable when you have enough history for stable averages. For early-stage businesses, treat it as directional.
LTV is half of the equation that decides whether your business model works. Compared against customer acquisition cost, it tells you whether each customer you buy pays back several times over. Without it, you are spending on acquisition blind.
There is no universal LTV target — it is judged relative to CAC. A healthy LTV:CAC ratio is around 3:1 or higher.
For comparing against acquisition cost, use gross-profit LTV — multiply by gross margin. Revenue LTV overstates value because it ignores the cost of serving the customer.
LTV is inversely proportional to churn. Halving your churn rate roughly doubles LTV, which is why reducing churn is one of the highest-leverage things a SaaS can do.
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