Customer lifetime value (LTV or CLV) is the total revenue a company expects to earn from a customer over the entire duration of the business relationship. It combines average revenue per customer with expected customer lifespan and gross margin. LTV is a cornerstone metric for assessing business model sustainability.
Formula
LTV = ARPU x Gross Margin x (1 / Monthly Churn Rate)In Depth
LTV answers the question: how much is a customer worth to the business over time? This seemingly simple metric underpins virtually all growth and investment decisions in subscription businesses. It determines how much can be spent on acquisition, which customer segments deserve the most attention, and whether the business model is fundamentally sound.
The basic formula for SaaS is: LTV = ARPU x Gross Margin x Average Customer Lifespan (in months). Average customer lifespan can be estimated as 1 / Monthly Churn Rate. For example, if monthly churn is 2%, average lifespan is 50 months.
More sophisticated LTV calculations use cohort-based retention curves rather than simple churn averages. This is important because churn rates are typically highest in early months and decrease over time — customers who survive the first year are much less likely to churn.
FP&A teams use LTV in multiple planning contexts. For budgeting, the LTV:CAC ratio determines how much the company can afford to spend on customer acquisition. For pricing strategy, LTV modelling shows the long-term impact of price changes (higher prices may increase LTV but also increase churn). For product development, identifying which features correlate with higher LTV guides investment priorities.
Expansion revenue — upsells and cross-sells — can significantly increase LTV. A customer who starts at £500/month but grows to £2,000/month through upgrades has a much higher LTV than the initial subscription suggests. Net revenue retention above 100% means existing customers generate more revenue over time.
For UK businesses, LTV calculations should use gross margin rather than revenue to reflect the actual value captured, and should consider the time value of money for long customer lifespans by applying a discount rate to future cash flows.
Real-World Example
A UK SaaS company has average revenue per account of £800/month, 78% gross margin, and 1.5% monthly churn. LTV = £800 x 0.78 x (1/0.015) = £800 x 0.78 x 66.7 = £41,600. With a CAC of £8,000, the LTV:CAC ratio is 5.2:1. The FP&A team models that improving churn from 1.5% to 1.2% would increase LTV to £52,000 — a 25% increase — making retention investment highly attractive.
Related Terms
Customer acquisition cost (CAC) is the total cost of acquiring a new customer, including all sales a...
Churn rate measures the percentage of customers or revenue lost over a given period. Customer churn ...
Net revenue retention (NRR) measures the percentage of recurring revenue retained from existing cust...
Average revenue per user (ARPU) is the total revenue divided by the number of active users or accoun...
Unit economics is the analysis of revenue and costs associated with a single unit of a business mode...
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