Revenue tells you how you did yesterday; Customer Lifetime Value (LTV) tells you how you will do tomorrow.
For business leaders focused on sustainable growth, LTV is the single most important metric for understanding the long-term health of an organisation. It predicts the total profit a customer will generate from their very first purchase to their last interaction. This guide moves beyond simple spreadsheet formulas to show you how to track LTV dynamically, segment it by cohort, and use it to make smarter marketing decisions.
What Is Customer Lifetime Value (CLV or LTV)?
Customer Lifetime Value is the total revenue or profit a business can expect from a single customer account throughout the entire business relationship. It serves as a compass for financial forecasting and strategic planning.
It is critical to differentiate between “Historical LTV” and “Predictive LTV”. Historical LTV measures what customers have spent so far, while Predictive LTV uses data to forecast what they will spend in the future.
This metric matters because it sets the upper limit for your Customer Acquisition Cost (CAC). If you do not know your LTV, you do not know how much you can afford to spend on ads to acquire a new client without losing money.
How To Calculate LTV (The Formulas)
To understand the health of your business, you must get comfortable with the maths. We will start with the simple calculations and move to the more advanced metrics that reveal true profitability.
The Simple Formula
This method is best for e-commerce businesses with relatively stable purchasing patterns. You calculate it by multiplying the average value of a sale by how often a customer buys, and then by how long they stay.
- Formula
- (Average Order Value) x (Purchase Frequency) x (Customer Lifespan)
- Example
- €50 per order x 4 orders per year x 3 years = €600 LTV.
The SaaS Formula
Subscription businesses require a different approach that accounts for recurring revenue and churn. This formula focuses on the monthly value of an account relative to the rate at which customers leave.
- Formula
- (Average Revenue Per Account / Churn Rate)
- Example
- €100 per month / 5% churn = €2,000 LTV.
The “True” Profit Formula
Revenue is not profit. To see the actual value a customer brings to your bottom line, you must apply your gross margin to the revenue figure. This prevents you from overspending on acquisition for low-margin products.
- Formula
- (LTV Revenue) x (Gross Margin %)
- Example
- €2,000 Revenue x 80% Margin = €1,600 Profit LTV.
Why You Need to Track LTV by Segment
“Average LTV” is often a lie. Averages hide the fact that your best customers might be worth ten times more than your worst ones. Tracking by segment reveals where your most profitable clients come from.
Channel Segmentation
Do customers from Google Ads have a higher LTV than those from Facebook? Often the answer is yes, due to higher purchase intent on search platforms. Knowing this allows you to bid more aggressively on high-quality channels.
Product Segmentation
Does a customer who starts with “Product A” stay longer than one who starts with “Product B”? Analysing this helps you determine which products serve as the best entry points for long-term retention.
Demographic Segmentation
Are enterprise clients actually more profitable after accounting for support costs? Sometimes smaller clients with lower support needs yield a better net margin than high-maintenance enterprise accounts.
The LTV:CAC Ratio: The Pulse of Your Business
The relationship between what you earn from a customer and what you spend to get them is the pulse of your business. A healthy business typically aims for a ratio of 3:1.
This means you should generate three times the value for every Euro spent on acquisition. If your ratio is lower, you are likely burning cash too quickly. If it is significantly higher, you might be under-investing in growth.
To improve this ratio, you have two levers. You can try to lower your CAC, which is often difficult in competitive markets. Alternatively, you can increase LTV, which is often easier and more sustainable.
You must also consider the payback period. This is the time it takes to earn back the acquisition cost. Aim for a payback period of less than 12 months to maintain healthy cash flow.
Strategies to Increase Customer Lifetime Value
Once you are tracking the numbers, the goal is to improve them. Here are actionable tactics to boost the value of your customer base.
Increase Average Order Value (AOV)
Cross-selling and up-selling at the point of purchase are effective ways to bump up the initial transaction value. Bundling complementary products encourages customers to spend more upfront.
Increase Purchase Frequency
Email marketing, loyalty programmes, and replenishment reminders keep your brand top-of-mind. Simple prompts like “It’s time to restock” can significantly shorten the time between orders.
Increase Lifespan (Retention)
Better onboarding and proactive customer success prevent churn before it happens. Creating “surprise and delight” moments builds emotional connection and extends the duration of the relationship.
The Future: AI-Powered LTV Tracking
The days of manual spreadsheet updates are ending. AI is shifting the focus from historical reporting to predictive action.
Predictive LTV Modelling
AI analyses early behaviours, such as logging in three times during the first week, to predict long-term value with high accuracy. This allows you to identify high-value customers days after they sign up, rather than waiting years.
Dynamic Customer Scoring
Every customer gets a live “LTV Score” that updates in real-time based on their actions. If a loyal customer suddenly stops engaging, their score drops, triggering an automated retention workflow.
Automated VIP Identification
AI flags high-potential customers for white-glove service before they spend big. This ensures your sales team focuses their energy on the leads with the highest mathematical probability of conversion.
Moterra: Your AI Growth Engine
Moterra positions you at the forefront of this shift. Stop guessing what your customers are worth. Let the AI Data Analyst reveal your true LTV.
FAQ
- What is a good LTV for SaaS?
It varies, but generally you want it to be greater than three times your CAC. For enterprise, LTV can be €100k+, while for SMBs it might range from €2k to €10k. - How do I calculate LTV for a new business?
You cannot use historical data yet. Use industry benchmarks or proxy data until you have at least 6 to 12 months of history to work with. - Does LTV include tax?
No. LTV should be based on revenue or gross profit, excluding sales tax or VAT. - How often should I update LTV?
Monthly is best. While it is a lagging indicator, trends can change quickly and you need to spot them early. - What is “Residual Lifetime Value”?
This is the amount of future value left in a customer, excluding what they have already spent.
