Definition
Customer Lifetime Value (LTV, or CLV) is the projected total profit a single customer will generate for a business over the entire duration of their relationship, accounting for retention, revenue per period, and gross margin.
LTV is the upper bound on what you can spend to acquire a customer. The LTV:CAC ratio — LTV divided by customer acquisition cost — is the single most important unit-economics metric in subscription and recurring-revenue businesses. A ratio above 3:1 is healthy; below 1:1 means you're losing money on every customer.
Most LTV calculations are wrong because they use revenue instead of gross profit, ignore variable costs, or assume retention curves that don't reflect reality. A useful LTV model requires gross-margin data, cohort-level retention curves, and a realistic projection horizon (most SaaS models use 3-5 years).
Origin
The concept dates back to direct-response marketing of the 1980s. SaaS economics formalised it in the 2010s as venture investors made LTV:CAC ratios the canonical health metric for subscription businesses.
How it works
- Pull average revenue per customer per month (ARPC).
- Pull gross margin percentage.
- Pull monthly retention rate (or its inverse, churn).
- Compute average customer lifetime in months: 1 / (1 - monthly retention).
- LTV = ARPC × gross margin × lifetime months.
- Refine with cohort-level retention if your customer behaviour varies by acquisition channel.
When to use it
Use when
- Setting CAC budgets for paid acquisition.
- Evaluating channel ROI.
- Investor due diligence.
- Pricing changes.
Skip when
- For one-time transaction businesses (use AOV instead).
- Pre-product-market-fit — LTV is unstable.
Key metrics
- LTV in dollars
- LTV:CAC ratio (target 3:1+)
- Payback period (months to recover CAC)
- Gross margin (input to LTV)
Examples
- Our LTV:CAC was 1.4:1 — that's why we were burning cash.
- We segmented LTV by acquisition channel and discovered Channel B had 4x the LTV of Channel A.
- The LTV model said we could spend up to $1,800 to acquire a customer — and we were spending $400. Time to scale paid.
In practice at Makreate
Makreate's advertising and outreach engagements track LTV as a leading metric, not just CAC. We segment LTV by acquisition channel and by ICP segment so we know which combinations are economically viable to scale. Most clients arrive with a single blended LTV figure and discover, within 60 days of segmenting, that some channels they were proudly running were destroying value while others they'd underinvested in were quietly the best ones.
Advertising →Common mistakes
- Using revenue instead of gross profit.
- Assuming a single LTV across all customer segments.
- Ignoring cohort variation — newer cohorts often retain differently.
- Projecting LTV over impossibly long time horizons.
- Not refreshing LTV as retention curves shift.
Frequently asked
What's a healthy LTV:CAC ratio?
3:1 or higher is healthy. 1:1 means you're breaking even on acquisition. Below 1:1 means you're losing money on every customer.
Do I use revenue or gross profit?
Always gross profit. Revenue-based LTV overstates the actual value because it ignores variable costs.
How long is a typical LTV projection?
3-5 years for SaaS; sometimes 5-7 years for sticky enterprise products. Beyond that, projections get unreliable.