SaaS Metric
Customer Lifetime Value (LTV)
Definition
Customer lifetime value (LTV or CLV) estimates the total gross-margin revenue an average customer generates before they churn. The margin-adjusted formula is LTV = (ARPA × gross margin %) ÷ monthly churn rate, because average customer lifetime ≈ 1 ÷ monthly churn. Compared against acquisition cost, an LTV:CAC ratio of 3:1 or higher is the standard healthy benchmark.
Formula
LTV = (ARPA × gross margin %) ÷ monthly churn rate LTV:CAC = LTV ÷ customer acquisition cost
Benchmark
LTV:CAC of 3:1 or higher is the standard healthy target. Below 1:1 you lose money per customer; far above 3:1 may mean you are underinvesting in growth.
Use gross margin, not revenue
A defensible LTV multiplies by gross margin, not raw revenue, because serving a customer has a cost. Revenue-based LTV systematically overstates value and makes the LTV:CAC ratio look healthier than it is.
LTV is extremely sensitive to churn because lifetime ≈ 1 ÷ churn. Halving monthly churn roughly doubles LTV. That is why retention work usually returns more than equivalent effort on acquisition.
LTV:CAC and payback
LTV:CAC compares the lifetime gross margin of a customer to what it cost to acquire them. CAC payback period — CAC ÷ (ARPA × gross margin) — measures how many months it takes to recoup that cost; under 12 months is generally healthy for B2B SaaS.
Frequently asked questions
How do you calculate customer lifetime value?
A common margin-adjusted formula is LTV = (ARPA × gross margin %) ÷ monthly churn rate. ARPA is average monthly revenue per account; dividing by churn reflects that lower churn means a longer expected lifetime.
What is a good LTV:CAC ratio?
The widely used benchmark is 3:1 — each dollar of acquisition cost returns about three dollars of lifetime gross margin. Below 1:1 you lose money on every customer; well above 3:1 can signal you are underinvesting in growth.
Should LTV use revenue or gross margin?
Use gross margin. Revenue-based LTV ignores the cost of serving the customer and overstates value, making LTV:CAC look better than reality.
Related metrics
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the fully loaded sales and marketing spend to win one customer. Learn the CAC formula, the LTV:CAC ratio, and healthy SaaS benchmarks.
CAC Payback Period
CAC payback period is how many months of gross margin it takes to recoup the cost of acquiring a customer. Learn the formula and healthy SaaS benchmarks.
Churn Rate
Churn rate is the percentage of customers or revenue lost in a period. Learn the customer churn and revenue churn formulas, healthy SaaS benchmarks, and how to reduce it.
Average Revenue Per Account (ARPA)
ARPA (average revenue per account), also ARPU, is recurring revenue divided by number of accounts. Learn the formula, why it matters for pricing and LTV, and how to grow it.
Track this automatically
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Benchmarks are general SaaS ranges and vary by segment, stage and business model. Last reviewed 2026-05-30.