LTV (Lifetime Value)

Simple LTV formula: LTV = (Average Revenue Per Customer Per Month) × (Average Customer Lifespan in Months) Better formula accounting for churn: LTV = (ARPU / Churn Rate) Example: If customers pay $100/month on average and churn rate is 5% monthly, LTV = $100 / 0.05 = $2,000. This customer will generate $2,000 before they leave. LTV:CAC ratio: The golden metric for sustainable growth. Target at least 3:1. If LTV is $2,000 and CAC is $300, your ratio is 6.67:1—excellent. If LTV:CAC is 1.5:1, you're barely profitable and can't scale profitably. Why LTV matters: It tells you the maximum you can spend on acquisition while staying profitable. If LTV is $2,000 and you want a 3:1 ratio, you can spend up to $666 on CAC. Spend more, you destroy value. Increasing LTV: (1) Reduce churn through better onboarding and engagement, (2) Upsell and cross-sell to increase ARPU, (3) Annual plans (higher upfront payment, better retention), (4) Build switching costs (integrations, data lock-in—use ethically). Common mistakes: (1) Calculating LTV from short time periods (your 3-month-old startup doesn't have enough data), (2) Ignoring cohorts—early adopters may have wildly different LTV than later customers, (3) Using gross margin in LTV but forgetting to subtract COGS from revenue (you don't keep 100% of what customers pay).

Enterprise SaaS with $50k annual contracts and 95% annual retention can have LTV over $500k. Consumer apps with $5/month subs and 40% annual retention might have LTV under $15. Know your numbers.