What it is
Lifetime Value (LTV) is the total profit one customer brings in across their entire time as a customer. You earn it slowly through every renewal, every upsell, every month they don’t cancel. The number tells you the ceiling on how much you can afford to spend winning that customer in the first place.
David Skok’s classic post on SaaS metrics is the source most founders reach for. The simple version of the formula:
LTV = (ARPU × gross margin %) ÷ monthly churn rate
ARPU is average revenue per user per month. Gross margin is the percent of that revenue you actually keep after the cost of serving the customer. Monthly churn is the percent of customers who cancel each month.
What it is NOT
| What it actually is | What people confuse it with |
|---|---|
| Total profit per customer | Total revenue per customer |
| A forward-looking estimate | A measured historical number |
| Sensitive to small churn changes | A stable single value |
| One side of a ratio (LTV ÷ CAC) | A number that means anything on its own |
A high LTV with bad churn assumptions is fiction. Two-point monthly churn versus five-point monthly churn changes LTV by 2.5×. The estimate is only as good as the churn input.
Worked example
A SaaS product charges $99/month. Gross margin is 80% (the other 20% goes to hosting, support, and payment fees). Monthly churn is 4%.
- ARPU × gross margin = $99 × 0.80 = $79.20 of monthly profit per customer
- Divide by churn = $79.20 ÷ 0.04 = $1,980 LTV
So the business can afford to spend up to $1,980 acquiring one customer before that customer becomes a net loss. The healthy threshold is to spend less than a third of that on acquisition (LTV ÷ CAC ≥ 3), which means CAC should sit below $660.
Common mistakes
1. Using revenue instead of profit. Skipping the gross-margin term inflates LTV by 25-40%. The number you compare against CAC must be profit, not revenue.
2. Optimistic churn. Founders without real retention data assume 2% monthly churn (“a great SaaS number”) instead of looking at their own ten customers. Half of B2C consumer apps churn at 6-10% monthly. Use real numbers from your real cohort.
3. Quoting LTV without the ratio. “Our LTV is $5,000” is meaningless without CAC. The ratio is the metric; the number is one of its two inputs.
4. Treating LTV as fixed. LTV moves every time your pricing changes, your churn shifts, or your gross margin compresses. Recompute quarterly.
Further reading
- David Skok, SaaS Metrics 2.0. The canonical reference for LTV/CAC mechanics.
- CAC glossary. The other half of the ratio.
- CAC/LTV ratio calculator. Plug in your numbers and get the verdict.
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