Customer lifetime value (LTV or CLV) estimates the total gross profit a customer will generate across the whole relationship, from first purchase to eventual churn. It answers a simple but decisive question: how much is a customer actually worth over time, as opposed to in their first month?
How it is estimated
A common form is average revenue per account, multiplied by gross margin, divided by the churn rate. Because the churn rate sits in the denominator, small improvements in retention produce outsized increases in LTV. Cutting annual churn from 10% to 5% roughly doubles the implied lifetime. This is the mathematical reason customer success has a direct line to enterprise value.
The LTV to CAC ratio
LTV is most useful alongside customer acquisition cost. The LTV:CAC ratio tells you whether the business is buying customers profitably. A widely used rule of thumb is that healthy SaaS companies run an LTV:CAC of 3:1 or better; below that, you are spending too much to acquire customers relative to what they return.
- Expansion revenue raises LTV by increasing revenue per account over time.
- Lower churn raises LTV by extending the relationship.
- A strong health score program protects LTV by catching every at-risk account before the relationship ends early.