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    Glossary

    Lifetime Value

    The total revenue a company expects to generate from a single customer over the entire duration of their relationship, a critical metric for unit economics.

    Lifetime Value (LTV) represents the total net revenue a business expects to earn from a customer throughout their entire relationship with the company. This metric stands as one of the most important indicators of long-term business viability, particularly for subscription-based businesses, SaaS companies, and consumer platforms where customer relationships extend beyond a single transaction.

    Calculating LTV requires three core components: average revenue per customer, gross margin, and customer lifespan. The basic formula multiplies average monthly revenue per customer by gross margin percentage, then multiplies that figure by the average number of months a customer remains active. For example, a SaaS company charging $100 per month with 80% gross margins and 36-month average customer retention would have an LTV of $2,880 per customer.

    Why It Matters

    LTV determines how much a company can afford to spend acquiring new customers while maintaining profitability. The LTV to Customer Acquisition Cost (CAC) ratio serves as a critical benchmark for investors evaluating business sustainability—most successful companies target an LTV:CAC ratio of at least 3:1. When LTV significantly exceeds acquisition costs, companies can aggressively invest in growth. Conversely, when LTV falls below three times CAC, the business model requires immediate attention or faces eventual cash flow problems regardless of top-line growth.

    Example

    A meal kit delivery service charges $60 per week with 40% gross margins. Initial cohort analysis shows customers stay active for an average of 32 weeks before churning. The company's LTV calculation: $60 × 0.40 × 32 = $768 per customer. If their blended CAC across all marketing channels runs $200, they achieve a healthy 3.8:1 ratio, suggesting room for increased marketing spend. However, if customer retention drops to 20 weeks due to increased competition, LTV falls to $480, creating a concerning 2.4:1 ratio that signals margin compression and growth constraints ahead.

    Customer Acquisition Cost
    Churn Rate
    Unit Economics