Lifetime value (LTV) is the total gross profit a customer is expected to generate over the time they remain a customer. It's used alongside customer acquisition cost (CAC) to evaluate whether a business can profitably scale. The metric must be calculated on gross margin, not revenue, because only gross-margin dollars are available to repay CAC and fund the rest of the business.
The standard SaaS formula is LTV equals average revenue per account (ARPA) times gross margin percent, divided by monthly customer churn rate. A SaaS company with $200 monthly ARPA, 80 percent gross margin, and 2 percent monthly churn has an LTV of ($200 x 0.80) / 0.02 = $8,000. This formula assumes a steady-state churn rate and works reasonably ...