What is Customer Lifetime Value (LTV)?
Short Answer
LTV is the total profit a company expects to generate from a customer relationship over its lifetime — calculated as (ARPU × Contribution Margin) / Monthly Churn.
Full Explanation
The simple formula for LTV is: LTV = (Annual Revenue per Customer × Contribution Margin %) / Annual Churn Rate. For example, if a customer generates £10K annually, the contribution margin is 70% (excluding CAC), and annual churn is 20%, then LTV = (£10K × 0.7) / 0.2 = £35K. This means the company expects £35K in profit from that customer relationship before CAC. LTV drives whether a business is viable: if CAC is £8K and LTV is £35K, the ratio is 4.4:1, which is healthy (typically 3:1 or better is acceptable). If LTV is only £12K, a £8K CAC is too high and the unit economics do not work. LTV is also used to determine payback period: if CAC is £8K and monthly contribution margin is £583, payback = £8K / £583 ≈ 14 months. Fast payback (under 12 months) frees up capital for re-investment; slow payback (over 24 months) ties up capital and is seen as high-risk. Improving LTV is often more impactful than reducing CAC — small improvements in churn or price can have outsized effects on LTV.
The transition from founder-led sales to scalable growth requires a shift in which metrics matter most. Early-stage companies focus on product-market fit indicators: activation rate, engagement frequency, and qualitative feedback. Growth-stage companies shift attention to efficiency metrics: customer acquisition cost relative to lifetime value, payback period, and gross margin. Late-stage companies preparing for exit must demonstrate both efficiency and predictability through metrics like net revenue retention, gross revenue retention, and logo churn. Each stage demands different measurement frameworks, and the intangible assets being built at each stage differ accordingly.
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Related Questions
CAC is the fully loaded cost to acquire a customer — including sales, marketing, and onboarding — divided by the number of customers acquired in a per...
Payback Period is the time (in months) for revenue from a customer to cover the CAC — calculated as CAC / Monthly Contribution Margin.
Quick Ratio measures (NRR × growth rate) / magic number, indicating whether a SaaS company's revenue growth is efficient and sustainable.
Further Reading
The Burn Multiple: Why Capital Efficiency Is the New Growth
The burn multiple has replaced growth rate as the metric investors scrutinise most. This guide explains the formula, stage-specific benchmarks, and why every dollar of burn should be creating an intangible asset that compounds in value.
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