What is customer lifetime value?
Customer lifetime value (CLV) is the estimated total revenue a business can expect from a single customer throughout the entire relationship.
Also known as LTV, this metric helps you understand how well your product meets customer needs, where you’re excelling, and where there’s room to improve. CLV is especially important for evaluating your return on acquisition costs and gaining a clearer picture of your long-term business health.
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Every new customer represents the start of a valuable relationship. And like any relationship, it’s natural to ask: How well are we connecting? Will this be a short-term engagement or something that grows over time? Fortunately, there’s a reliable way to evaluate the strength and potential of each customer relationship—without the guesswork. It’s called customer lifetime value (CLV).
How do you calculate customer lifetime value?
You calculate customer lifetime value by multiplying your average revenue per user (ARPU) by gross margin and dividing that number by your churn rate.
While there are more complex ways to look at LTV, this basic customer lifetime value formula focuses on three primary inputs:
- ARPU. The average revenue per user for your customer base over a given time period (e.g., one year).
- Gross margin. Your net sales revenue minus cost of revenue shows your profit margins across the business.
- Churn or attrition rate. The percentage of customers who stopped using your product or service in the given period. It’s the inverse of your logo retention rate.
It’s simple: the longer a customer continues to use your product or service, the higher their lifetime value grows.
Customer lifetime value example calculation
Average Revenue Per User (ARPU): Suppose a service has an ARPU of $120 per month.
Gross Margin: The gross margin for this service is 80%. This means that after subtracting the cost of delivering the service, 80% of the revenue is retained as profit.
Churn Rate: The churn rate, which represents the percentage of customers discontinuing their service each year, is 5%.
Using the basic LTV formula:
LTV= $120 x 80% / 5% = $96 / 0.05 =$1,920
Therefore, the LTV for a customer in this example is $1920. This figure represents the net profit that is expected to be generated, on average, from each customer over the duration of their relationship with the service.
What’s the difference between CLV and LTV?
There’s no material difference between the terms “CLV” and “LTV” (or even CLTV). These acronyms all refer to customer lifetime value which is a useful financial ratio that can be used to analyze a company, and are often used interchangeably. For many companies, usage of each term often comes down to an agreed-upon preference (ours is LTV).
However, some companies will distinguish between CLV and LTV in terms of granularity. In those cases, LTV refers to the average customer lifetime value across the entire customer base, whereas CLV refers to lifetime value for an individual account.
We view that kind of granularity as a drill-down view of the same metric, so we refer to customer lifetime value as LTV in all cases.
Key insights
- Customer lifetime value (CLV or LTV) estimates the total revenue from a customer over the entire relationship.
- LTV = (ARPU × Gross Margin) ÷ Churn Rate is the standard formula used in SaaS.
- CLV and LTV are often used interchangeably; some define LTV as an average and CLV as customer-specific.
- Improving LTV involves boosting retention, raising prices, and adding upsell opportunities.
- Modern FP&A tools automate LTV tracking by integrating CRM data and providing real-time insights.
- A strong LTV/CAC ratio (3:1 or higher) signals sustainable growth and efficient acquisition.
Why does customer lifetime value matter?
Customer lifetime value is an extremely important metric in SaaS because it tells you the total revenue you can expect a customer to generate over the course of your relationship together.
While finance teams don’t directly impact the customer experience, your ability to accurately calculate the lifetime value of a customer can help partners in the C-suite, product, sales, marketing, and customer support understand a few important things.
- Calculating customer lifetime value can give executives insight into the long-term viability of the business model.
- Understanding the value of customer relationships helps CS and support justify the costs of new initiatives like loyalty programs or investments in automation that could streamline processes and improve overall customer satisfaction.
- Seeing LTV according to customer segments can help marketing refine their strategies for targeting new customers with upcoming campaigns. And it can help sales improve cross-sell strategies for accounts that are most valuable to the business.
- Visibility into the lifetime value of current customers can help forecast and plan more accurately for the future. It helps you understand the true business impact of modeling out improved customer retention rates and assumptions of longer customer lifespans.
Tried and tested ways to improve LTV
SaaS companies can live and die by their ability to build momentum with their customer bases. While top-line growth gets so much attention, you also have to show that you can retain those customers and create a sustainable business.
To that end, there are three primary levers you can pull to improve LTV.
Invest in customer success
One of the most effective ways to increase LTV is by improving customer retention. Acquiring new customers is significantly more expensive than keeping the ones you already have. That’s why performing a customer retention analysis and investing in customer success can make a meaningful impact. Whether it’s improving communication around new feature releases, shortening response times for support issues, or creating a smoother onboarding experience—small enhancements to the customer journey can go a long way in building loyalty.
Raise your prices
The most basic way to increase LTV is to raise your pricing. Boosting average order value (in ecommerce) or annual contract value (in SaaS) gives you more revenue per customer, assuming all else remains equal. But there are diminishing returns. You always have to balance pricing with the value your product delivers to customers.
Build price escalations into your contracts
You can increase LTV by adding more customization to your SaaS pricing strategy. Creating add-on features and escalation factors for product usage can naturally increase net revenue retention — which in turn increases LTV.
LTV is a highly-nuanced metric, which means there are many more ways you could potentially increase it for your business. However, the three options listed here are among the most basic because they tie directly to the metrics you use to calculate LTV.
Why tracking LTV used to be so difficult
The reality is: tracking LTV isn’t easy. Measuring something as nuanced as customer sentiment takes a lot of data. You need to track when a customer first purchased, the terms of their contract, and any upsells, downgrades, and renewal rates over time. You’ll also want to break it down by cohort and product line to understand how different seasons, time periods, or offerings influence long-term value.
That means digging through a lot of customer data—often scattered across the customer lifecycle and tucked away in your CRM in hard-to-reach, hard-to-parse formats. It takes serious time and effort to pull, clean, and analyze that data. And to really optimize for sustainable growth, you’ll want to layer in your customer acquisition cost (CAC), too.
The challenge? There hasn’t been an easy, reliable way to generate an accurate LTV metric. For most teams, it’s meant wrestling with spreadsheets and spending hours manually crunching numbers—often with inconsistent results.
The good news? That’s starting to change.
How to calculate lifetime value (without taking years off your life)
FP&A platforms can help you connect your CRM and automatically collect, normalize, and calculate your customer LTV. They even group customers by cohort and product line, so you can track the effectiveness of specific sales and marketing efforts and pin down the most valuable customer journeys and milestones — all in real-time.
Having a solid (and current) understanding of your LTV can help your business identify successful strategies for customer onboarding and retention, as well as common customer stumbling blocks, which helps you plan for smart, sustainable growth and boost your bottom line.
Customer lifetime value FAQs
What is the formula to calculate customer lifetime value?
The CLV formula is (Average Revenue Per User * Gross Margin) / Churn Rate. This means that the customer lifetime value calculation favors a higher ARPU and gross margin, as well as a lower churn rate. The best customers that can ultimately lead you to negative churn are high-value customers with a longer than average customer lifespan.
How do you increase customer lifetime value?
The best way to improve LTV is to generate more brand loyalty and create loyal customers. This can include anything from improving your customer retention through a strong presence on social media about upcoming features to improving the client experience based on customer feedback, ensuring your customers’ basic needs are met, and going the extra mile to add value for them. You can also raise prices to increase average CLV, although this is a less sustainable way to increase lifetime value.
What qualifies as a high CLV value?
A high customer lifetime value is three times your customer acquisition cost. If your LTV/CAC ratio is lower than that, it can mean your business is losing money in customer acquisition, while a ratio of more than 3:1 can indicate that you’re not putting enough money into growth opportunities.
