Customer Lifetime Value (LTV) Explained

Customer Lifetime Value (LTV) is the total revenue you can expect from a single customer over their entire relationship with your business. It's one of the most important numbers in your unit economics because it determines how much you can afford to spend acquiring customers.

If you don't know your LTV, you're flying blind with your ad spend. You might be overpaying for customers who'll never be worth it — or underinvesting in channels that bring incredibly valuable ones.

The LTV Formula

There are several ways to calculate LTV depending on your business model:

For subscriptions and SaaS

LTV = Average Monthly Revenue per Customer ÷ Monthly Churn Rate

If customers pay $50/month and your monthly churn rate is 5% (meaning 5% of customers cancel each month):

LTV = $50 ÷ 0.05 = $1,000

This formula works because dividing by churn rate gives you the expected customer lifespan in months (1 ÷ 0.05 = 20 months), then multiplies by monthly revenue.

For e-commerce and transactional businesses

LTV = Average Order Value × Purchase Frequency × Customer Lifespan

If customers spend $75 per order, buy 4 times per year, and stay active for 3 years:

LTV = $75 × 4 × 3 = $900

Quick estimate

If you don't have detailed data yet, a rough approach:

LTV = Total Revenue ÷ Total Unique Customers (over a multi-year period)

This gives you a historical average LTV. It's imprecise but better than guessing.

Why LTV Matters for Advertising

LTV is the ceiling on your customer acquisition spending. If you know a customer is worth $1,000 over their lifetime, you can make informed decisions about how much to spend getting them.

The LTV:CAC ratio is the key metric:

• Below 1:1 — You're losing money on every customer. Stop and fix either your product (retention) or your acquisition (costs).
• 1:1 to 3:1 — Unsustainable. You're barely breaking even after other business costs.
• 3:1 to 5:1 — The healthy zone. You're spending efficiently and have room to grow.
• Above 5:1 — You might be under-investing in growth. Test increasing ad spend — there are likely profitable customers you're not reaching.

This ratio directly informs your ROAS targets and your CAC ceiling. If your LTV is $600 and you target a 3:1 ratio, your max CAC is $200 — which means every ad campaign needs to acquire customers at or below that cost.

LTV Benchmarks

LTV varies enormously by business model:

• SaaS (B2B): $5,000-50,000+ (long contracts, high retention)
• SaaS (B2C): $200-2,000 (shorter lifespan, lower price points)
• E-commerce (repeat purchase): $150-500 (depends on purchase frequency)
• E-commerce (one-time): Close to average order value
• Subscription boxes: $200-600
• Mobile apps: $10-100 (high churn, low monetization)

The benchmarks matter less than the trend. Is your LTV going up or down? That tells you more about business health than the absolute number.

How to Increase LTV

There are really only three levers:

1. Reduce churn (keep customers longer). This is usually the highest-impact lever. For SaaS, improving retention from 95% to 97% monthly increases average lifespan from 20 to 33 months — a 65% LTV increase from a 2-point improvement. Focus on onboarding, product value, and proactive support.

2. Increase revenue per customer. Upsell higher plans, offer add-ons, raise prices for new customers, or introduce usage-based pricing. For e-commerce, increase average order value through bundles, cross-sells, and minimum-order incentives.

3. Increase purchase frequency. Email campaigns, loyalty programs, subscription options, and retargeting ads can all drive repeat purchases. A customer who buys 6 times a year instead of 4 has 50% higher LTV.

LTV and Your Ad Strategy

LTV should directly shape how you run ads:

• Segment LTV by acquisition channel. Customers from Google Search might have 2x the LTV of customers from Facebook. That means you can afford higher CPC on Google even if the upfront cost is more.
• Calculate max CAC per channel. If Google customers have $1,200 LTV and Facebook customers have $600 LTV, your max CAC for Google is $400 (at 3:1) but only $200 for Facebook.
• Track payback period alongside LTV. A $1,000 LTV customer is great, but if payback takes 18 months, you need deep pockets to fund growth.

Use our LTV Calculator to model yours with different retention and revenue scenarios.