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Average Lifetime Value (LTV)

Finance

What is Average Lifetime Value?

Average Lifetime Value (LTV) is the average revenue billed to a customer over their entire lifetime. High LTV often positively correlates with successful long-term service agreements and robust customer success strategies that focus on decreasing churn.

How is Average Lifetime Value (LTV) used?

This metric helps to understand profitability on a customer level by comparing it to Customer Acquisition Cost (CAC). A higher LTV:CAC indicates that revenue generated from a customer over their lifetime with the business outweighs the cost of acquiring them. Ideally, LTV should be over twice the CAC. LTV informs customer segmentation, aligns acquisition spending with long-term profitability, drives planning for customer success initiatives, and helps pinpoint upsell and cross-sell opportunities.

How to calculate Average Lifetime Value (LTV)

Average Revenue Per Customer (ARPA) x Average Customer Lifespan

To calculate LTV, multiply the Average Revenue Per Account (ARPA) by the Average Customer Lifespan.

Best Practices

When analysing LTV, segment the data by customer type and acquisition source to detect which channels are producing the most valuable customers. Focus on driving up-sells and cross-sells, implementing customer loyalty programmes, reducing churn, and increasing re-activation. Ex-customers already understand the proposition and are likely to have a higher return on investment (ROI) compared to new customers.

Common Misconceptions

LTV is not so much a revenue metric but more a profitability metric. Confusion often occurs when failing to account for Customer Acquisition Costs (CAC) required to generate the LTV.

LTV helps in identifying customer segments that are likely to spend more over a longer period, thus enabling more targeted and profitable marketing strategies

Avinash Kaushik
/
Chief Strategy Officer, Croud

"Ideally you want the lifetime value to be three times the cost of what it took to acquire."

Rav Daliwal
/
VC, Slack

FAQs

What are the main drivers of Average Lifetime Value (LTV)?
  • Average customer lifespan
  • Churn
  • Up-sell/cross-sell effectiveness
  • Re-activation
How should I break down Average Lifetime Value (LTV)?
  • Industry vertical
  • Geography
  • Company size
  • Acquisition channel
  • Product

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