What Is LTV?
LTV (Customer Lifetime Value) is the total revenue — or profit — a business expects to earn from a single customer over the entire relationship. It answers the most critical question in growth strategy: how much is a customer worth, which directly sets the ceiling for customer acquisition spend.
LTV Formulas
E-commerce / Transactional
LTV = Average Order Value × Purchase Frequency × Customer Lifespan
Example: $80 AOV × 4 purchases/year × 3 years = $960 LTV
SaaS / Subscription
LTV = Monthly ARPU ÷ Monthly Churn Rate
Example: $50 ARPU ÷ 2% monthly churn = $2,500 LTV
The LTV/CAC Ratio: Your Most Important Business Health Metric
LTV in isolation is meaningless without comparing it to what it costs to acquire a customer (CAC):
| LTV/CAC Ratio | Meaning | Action |
|---|---|---|
| < 1 | Losing money on every customer | Fix immediately — unsustainable |
| 1–3 | Marginally profitable, long payback | Improve LTV or reduce CAC |
| 3–5 | Healthy — typical SaaS benchmark target | Scale acquisition confidently |
| > 5 | Excellent acquisition efficiency | Consider more aggressive expansion |
Use the Calculator
Use tool.tl's LTV calculator: enter your AOV, purchase frequency, and customer lifespan (or ARPU and churn rate), plus your CAC, to instantly see LTV, LTV/CAC ratio, and payback period.
How to Increase LTV
- Increase purchase frequency: Loyalty programs, re-engagement campaigns, subscription options
- Raise average order value: Upsell to higher tiers, cross-sell complementary products, minimum order incentives
- Extend customer lifespan: Better onboarding, proactive customer success, reduce churn
- Improve gross margin: Optimize cost structure so each revenue dollar generates more profit
Common LTV Calculation Mistakes
- Using revenue instead of profit: LTV based on gross margin is more accurate — revenue-based LTV overstates true value
- Ignoring time value of money: Cash received in year 5 is worth less than cash today. Precise LTV uses a discount rate for present value
- Averaging across customer segments: Enterprise customers may have 50× the LTV of SMB customers. Segment before calculating
Frequently Asked Questions
How do I estimate LTV without historical data?
Use industry benchmarks as initial assumptions, then refine with real data as it accumulates. Early retention curves (30-day and 90-day retention rates) can build a reasonable LTV prediction model before you have full cohort data.
What is CAC payback period?
Payback Period = CAC ÷ Monthly Gross Profit per Customer. Healthy SaaS companies typically target a payback period under 12 months. Under 6 months is excellent.
Is the calculator free?
Yes — tool.tl's LTV calculator is completely free, supports multiple calculation modes, no account required.