Lifetime Value (LTV)
The estimated total gross profit a customer will generate over their entire relationship with the company.
FORMULA
LTV = (ARPA × Gross Margin %) / Gross Logo Churn RateWhy it matters
Lifetime Value projects the long-term enterprise value generated by the customer base. By estimating the total gross margin a customer will deliver before they churn, companies can determine an upper bound for what they can rationally spend to acquire them (CAC). Traditional LTV formulas assume a constant churn rate stretching into infinity, which often overstates value for early-stage companies with limited cohort data. Mature operators use a capped LTV approach—typically limiting the modeled lifespan to 3 or 5 years—to ensure they aren't justifying high acquisition costs based on theoretical future revenue that may never materialize.
2025 BENCHMARK
SaaS Capital's 2025 survey notes that top-decile SaaS companies model LTV using a strict 5-year cap to maintain conservative forecasting.
COMMON MISTAKES
- Calculating LTV using total revenue instead of gross margin.
- Using a blended churn rate that hides high churn in the early months of a cohort.
- Assuming an infinite lifespan for customers, leading to vastly overstated LTV.