What Is Lifetime Value (LTV)?

Lifetime value (LTV) is how much a customer is worth over their full relationship with you — the number you compare to CAC to see if growth is profitable.

How it works

For subscription businesses, a common formula is LTV = (ARPA × gross margin %) / logo churn rate — but cohort-based LTV from actual retention curves is stronger. Marketplaces may compute LTV separately for supply and demand sides.

LTV:CAC ratio and CAC payback period are paired metrics. Investors want definitions consistent across board decks — gross vs net LTV, with or without support costs included.

Why it matters

• Founders: Segment LTV by channel and customer size. Enterprise lands with long payback can still be good if expansion lifts LTV.
• Investors: LTV drives allowable CAC and therefore growth spend. Sudden LTV drops often mean product or market problems, not marketing tweaks.
• Operators: Support and success teams directly affect retention, which is the biggest lever on LTV.

Include gross margin in LTV, not revenue alone — low-margin businesses need higher lifetime revenue to justify the same CAC. Support and success costs can be subtracted for a “contribution LTV” view favored by some investors.

Payback period pairs with LTV:CAC: a 3:1 ratio with 24-month payback may be worse than 2.5:1 with 6-month payback depending on capital constraints.

Common mistake

Using company-wide average churn for enterprise accounts that never churn like self-serve users. Segment or the ratio misleads.

Related ideas

• CAC and payback period
• Logo retention
• Net revenue retention in SaaS