Lifetime Value (LTV)
Lifetime Value (LTV) is the total revenue or gross profit a customer generates across the entire customer relationship — used in B2B SaaS as the numerator in LTV:CAC ratio analysis and as a primary input in customer-level investment decisions.
Why This Matters
LTV is foundational to B2B SaaS unit economics analysis. Common calculation: ARR × Gross Margin × Average Customer Lifetime. A customer with $30K ARR, 80% gross margin, and 5-year average lifetime has $120K LTV. Average customer lifetime is calculated as 1/churn rate — 20% annual churn implies 5-year average lifetime. LTV grows with retention improvement, expansion success, and pricing increases over the customer relationship. LTV decreases with churn rate increases and gross margin compression. The metric is sensitive to assumptions — small changes in churn rate produce large LTV changes.
Frequently Asked Questions
Frequently Asked Questions
How is B2B SaaS LTV calculated?
Most common formula: ARR × Gross Margin × Average Customer Lifetime. Average customer lifetime = 1 / annual churn rate. So a customer with $30K ARR, 80% gross margin, and 20% annual churn (5-year lifetime) has LTV = $30K × 80% × 5 = $120K.
What's the relationship between LTV and CAC?
LTV:CAC ratio measures customer profitability relative to acquisition cost. Healthy B2B SaaS achieves 3:1 or higher LTV:CAC. Below 3:1 indicates marginal customer economics; above 5:1 may indicate underinvestment in growth. The ratio guides customer acquisition investment decisions.