Customer Lifetime Value is the total economic value of a customer over their entire relationship with you — every order, every renewal, every upsell. It's the foundation under every aggressive paid-acquisition strategy: if you know your LTV, you know how much you can afford to spend acquiring each customer.
LTV = AOV × Purchase Frequency × Customer Lifetime
For SaaS: LTV = ARPU × Gross Margin / Churn Rate. There are dozens of more sophisticated LTV models; the simple version covers most operational decisions.
Why it matters
LTV is the upper bound on what acquisition can cost. If your 12-month LTV is €120, spending €100 to acquire a customer is profitable — but only if you can fund the gap between the spend (today) and the revenue (over the next year). LTV decides not just whether you can spend, but how much working capital you need behind the spend.
LTV-to-CAC ratio
The single number most operators watch is LTV ÷ CAC. A ratio above 3× is generally healthy; 5×+ means you're under-investing in growth and could spend more aggressively. Below 2× means you're acquiring customers at a loss the back-end won't recover.
Common misuses
- Using gross revenue LTV instead of contribution-margin LTV — the former overstates your acquisition budget by your COGS percentage
- Treating cohort-1 LTV as steady-state LTV. Newer customer cohorts often look better than older ones because of survivorship bias.
- Ignoring LTV by segment — wholesale customers, organic-search customers, paid-meta customers often have wildly different LTVs