LTV (Customer Lifetime Value)
Healthy SaaS has LTV:CAC ratio of 3:1 or higher. Ratio below 1:1 means you lose money on every customer—common in SMB SaaS without product-market fit (a]6z 2024).
💡TL;DR
LTV = ARPU × Gross Margin × (1 / Churn Rate). For monthly metrics: LTV = Monthly ARPU × Gross Margin % / Monthly Churn %. Example: $100 ARPU × 80% margin / 3% churn = $2,667 LTV. Target LTV:CAC ratio of 3:1+. SMB customers typically have lower LTV due to higher churn—compensate with lower CAC or faster payback. LTV guides acquisition budget and segment prioritization.
Definition
The total revenue a business expects from a single customer account over the entire relationship. LTV = ARPU × Gross Margin × Customer Lifespan (or ARPU × Gross Margin ÷ Churn Rate). It determines how much you can spend to acquire customers profitably.
🏢What This Means for SMB Teams
SMB customers churn 2-3x faster than enterprise, compressing LTV. Either reduce CAC proportionally or add expansion revenue (upsells, cross-sells) to extend effective lifetime value.
Track MRR, churn, CAC payback—AI acts when metrics slip.
Metrics that matter, actions that move them.
📋Practical Example
A 30-person marketing SaaS discovered their LTV:CAC was 1.8:1—below the 3:1 benchmark. They segmented customers and found: Agencies had LTV $8,200 (low churn), SMBs had LTV $2,100 (high churn). They shifted 60% of ad spend to agency-focused channels, raised SMB prices 20%, and added an agency-specific tier. Result: Blended LTV:CAC improved to 3.4:1, making growth profitable.
🔧Implementation Steps
- 1
Calculate average customer lifespan (1 / monthly churn rate for monthly figure).
- 2
Determine ARPU including expansion revenue over customer lifetime.
- 3
Apply gross margin (typically 70-85% for SaaS) to get contribution-based LTV.
- 4
Segment LTV by customer type, acquisition channel, and cohort.
- 5
Set CAC ceiling at LTV ÷ 3 for each segment; adjust spend accordingly.
❓Frequently Asked Questions
Should I use gross margin or net margin in LTV?
Use gross margin for standard LTV—it reflects contribution after COGS (hosting, support). Net margin LTV is useful for mature businesses evaluating true profitability, but includes too many allocations for growth-stage decision-making.
How do I calculate LTV with limited historical data?
Use cohort-based projections: track each signup cohort's retention curve and extrapolate. Conservative approach: use 24-month capped LTV until you have 3+ years of data. Update quarterly as more data accumulates.
⚡How Optifai Uses This
Optifai calculates LTV by segment automatically and shows LTV:CAC ratio in the Revenue Dashboard. High-LTV accounts are prioritized in lead scoring, and expansion signals trigger upsell workflows for LTV maximization.
📚References
- •
- •
Related Terms
CAC (Customer Acquisition Cost)
Total sales and marketing spend divided by new customers gained in a period. It includes media, tools, payroll, agencies, and overhead allocated to acquisition. Teams track CAC alongside payback period and LTV to know whether growth is profitable.
NRR (Net Revenue Retention)
The percentage of recurring revenue retained from existing customers after accounting for expansion, contraction, and churn. NRR = (Starting MRR + Expansion - Contraction - Churn) ÷ Starting MRR × 100. NRR >100% means you grow even without new customers.
Churn Risk Signals
Behavioral indicators that predict customer churn before it happens. Common signals include: declining login frequency, reduced feature usage, support ticket spikes, NPS score drops, billing page visits, and engagement with competitor content. Early detection enables proactive intervention.
Expansion Playbooks
Documented, repeatable sequences for upselling existing customers to higher tiers or cross-selling additional products. Includes trigger conditions, talk tracks, objection handling, and success metrics. Expansion playbooks systematize what top performers do naturally.