Lifetime Value (LTV) describes the total monetary value a customer generates over the entire duration of their relationship with a company. The metric is central to assessing the economics of a business model because it shows how much a company can spend on customer acquisition without losing money. The simple formula is: average revenue per period multiplied by average customer lifetime, minus costs.
The ratio of LTV to CAC (Customer Acquisition Cost) is one of the most important metrics in business model design. An LTV/CAC ratio of 3:1 is considered healthy; below 1:1, the company burns money with every new customer. A subscription-based SaaS company with 100 euros monthly revenue per customer and an average contract duration of 24 months has an LTV of 2,400 euros. If CAC is 800 euros, the model is viable. If it is 3,000 euros, either CAC must decrease, revenue per customer must increase, or the churn rate must fall.
LTV is particularly relevant for subscription models and platforms where the initial investment in customer acquisition is high and only amortizes over time. Without LTV analysis, growth investments become a flight without instruments.
