Customer lifetime value (LTV) is the total revenue a customer generates from their first purchase to their last, before they churn.
It is the single most important number in SaaS unit economics because everything else scales from it: your acquisition budget, product investment, hiring plans, and pricing decisions.
The basic formula
LTV = Average Revenue Per Customer per Month × Average Customer Lifetime in Months
Example: A customer paying $200/month with a monthly churn rate of 5% has an average lifetime of 20 months (1 / 0.05). LTV = $200 × 20 = $4,000.
The formula gets more sophisticated when you account for expansion revenue, gross margin, and cohort behavior, but this is the starting point.
Why LTV matters more than revenue
Two SaaS companies with $1M ARR can have wildly different economics:
- Company A: $200 ARPU × 5,000 customers × 5% monthly churn = $4K LTV. Can spend up to $1,300 to acquire a customer profitably.
- Company B: $200 ARPU × 5,000 customers × 2% monthly churn = $10K LTV. Can spend up to $3,300 to acquire a customer profitably.
Same revenue. Same customer count. Same average price. But Company B has 2.5x the acquisition budget per customer. It can outbid Company A in every marketing channel and still be more profitable.
This is why retention work has such compounding returns. Every 1% reduction in monthly churn increases LTV meaningfully, which increases every downstream budget.