How Much a Customer Is Worth
Lifetime Value (LTV) is the total revenue a customer generates over their entire relationship with your business. It’s the counterpart to CAC — together they determine if your business model works.
The Formula
LTV = (Average Revenue Per User) × (Average Customer Lifespan)
Or for SaaS:
LTV = (ARPU × Gross Margin) / Churn Rate
Example:
- Monthly subscription: $50/month
- Average customer stays 24 months
- LTV = $50 × 24 = $1,200
The Golden Ratio
LTV:CAC = 3:1 or higher
- If LTV = $1,200 and CAC = $300 → Ratio is 4:1 (healthy)
- If LTV = $600 and CAC = $500 → Ratio is 1.2:1 (not sustainable)
Why It Matters
Investors care: VCs won’t fund businesses where LTV < 3× CAC.
Growth strategy: High LTV allows aggressive spending on acquisition.
Retention focus: Increasing LTV by 10% (better retention) = 10% more valuable business.
Increasing LTV
- Reduce churn: Keep customers longer (Netflix, Spotify focus here)
- Upsell/cross-sell: Sell more to existing customers (AWS model)
- Raise prices: Controversial but effective if value is there
- Annual contracts: Lock in customers for 12+ months upfront
- Improve product: More value = lower churn
Famous High-LTV Businesses
- Adobe Creative Cloud: $50-80/month, users stay for years → LTV $3,000-$5,000
- AWS: Enterprise contracts, multi-year commitments → LTV millions
- Salesforce: Annual contracts, sticky platform → LTV $50K-$500K+ per customer
- Netflix: $15/month, avg customer stays 5+ years → LTV $900+
Famous Low-LTV Disasters
- Meal kit services (Blue Apron, HelloFresh): High churn (customers quit after novelty wears off), LTV $200-$300 but CAC $400+
- Daily deals (Groupon): Customers buy once, never return → LTV = single purchase
- Mattress companies (Casper): Buy once every 7-10 years → low repeat revenue
Cohort Analysis
Smart companies track LTV by cohort:
- Month 0-6: New customers, fragile
- Month 6-12: Sticky customers emerging
- Month 12+: Loyal customers, highest LTV
Sources: Baremetrics LTV Guide, ProfitWell