Lifetime Value is the total revenue a customer generates during their entire relationship with your business. It helps determine how much you can spend on customer acquisition while remaining profitable.
LTV represents the total gross profit from a customer over their lifetime. Formula varies by business model. For subscription: LTV = ARPU × Gross Margin % ÷ Churn Rate. For transactional: LTV = Average Order Value × Purchase Frequency × Customer Lifespan × Gross Margin %. Example: SaaS with ₹1,000 monthly ARPU, 80% margin, 5% monthly churn: LTV = ₹1,000 × 0.80 ÷ 0.05 = ₹16,000. For e-commerce with ₹2,000 average order, 4 purchases/year, 3-year lifespan, 40% margin: LTV = ₹2,000 × 4 × 3 × 0.40 = ₹9,600. LTV matters because it determines sustainable CAC. Rule of thumb: LTV should be 3x CAC minimum. If LTV = ₹15,000 and CAC = ₹3,000, you have healthy unit economics (5x ratio). If LTV = ₹5,000 and CAC = ₹6,000, you lose money on every customer. Improving LTV: (1) Reduce churn—longer retention = higher LTV, (2) Increase pricing—higher ARPU directly boosts LTV, (3) Upsell/cross-sell—expand account value over time, (4) Improve margins—reduce COGS without cutting value. Companies with high LTV can outspend competitors on acquisition, creating competitive moats.
LTV = (ARPU × Gross Margin %) ÷ Monthly Churn Rate (for subscription) OR Average Order Value × Purchase Frequency × Customer Lifespan × Margin % (for transactional)Average Prime member spends ₹60,000/year vs ₹24,000 for non-Prime. Over 5-year average membership, LTV ≈ ₹3,00,000. Justifies ₹50,000+ acquisition cost.
Enterprise customers start at ₹10 lakhs/year, expand to ₹50 lakhs+ over 5 years, 90%+ retention. LTV = ₹2-3 crores. Can afford ₹40 lakh+ sales/marketing per logo.
Average subscriber pays ₹650/month, stays 4.5 years. LTV = ₹35,000. CAC ≈ ₹10,000 (3.5x ratio). Profitable unit economics enable growth.
LTV determines how much you can profitably spend on customer acquisition. High LTV businesses (enterprise SaaS, subscriptions) can outspend low LTV competitors (transactional, one-time purchases) on sales and marketing, creating sustainable competitive advantages. Investors value high LTV:CAC ratios (5x+) as evidence of scalable, profitable growth.
3x minimum for healthy business. 5x+ is excellent. 10x+ rare but achievable with viral/organic growth. Below 3x means you're spending too much on acquisition or not retaining/monetizing customers well enough.
For early-stage startups, calculate LTV based on 12-18 month cohorts (not full lifetime). As you mature and have multi-year data, use actual lifetime. Avoid speculative 5-10 year projections without historical proof.
Yes! Expansion revenue (upsells, cross-sells, seat expansion) is core to SaaS LTV. Many SaaS companies get 20-40% of revenue from existing customer expansion. Include it but track net revenue retention separately.
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