LTV: the lifetime value that should govern your sales model

LTV, lifetime value, is the total revenue an average customer brings you before they leave. The formula in its simplest form: average annual revenue per customer times average customer lifespan in years, ideally adjusted for gross margin. That number should govern how much you dare to spend on acquiring and keeping customers. Here is how to calculate and use it.

How do you calculate LTV?

Two variants, depending on how your business works:

Simple variant: LTV = average revenue per customer per year × average lifespan in years

Churn based variant (subscriptions): LTV = average annual revenue per customer / annual churn

Example: if an average customer pays 120,000 per year and your annual churn is 20 percent, the lifespan is 5 years and LTV is 600,000. If you want to be strict, multiply by gross margin. At 80 percent margin, margin adjusted LTV is 480,000.

Three things not to get sloppy with:

• Count revenue you keep, not one off items like implementation fees unless they recur.
• Segment. LTV for small customers and large customers in the same average hides where the money is.
• Update yearly. Churn and pricing change, and so does LTV.

What is the LTV/CAC ratio and why is 3x the rule of thumb?

LTV/CAC weighs customer value against what the customer cost to acquire. The ratio tells you whether your sales model holds:

Why 3? Because LTV is realized over several years while CAC is paid now, and because the math needs to survive churn rising or CAC climbing. A ratio over 5 sounds great but often means you could grow faster by spending more on sales and marketing.

How should LTV govern your sales model?

Once you know LTV per segment, you can make decisions that otherwise become guesses:

• How expensive a sales process you can afford. A customer worth 600,000 can carry field sales and long cycles. A customer worth 30,000 needs a cheaper engine.
• Which segments to chase. Put the budget where LTV/CAC is highest, not where leads are cheapest.
• When to hire. A salesperson who costs 500,000 fully loaded per year needs to close a certain amount of LTV to pay off. Now you can do that math.

Why are churned customers with high LTV worth a winback?

A customer who left you is not zero value. They know your product, have already been through a buying process and sit in your CRM with the full history. If the customer's segment has high LTV, the math is clear: a successful winback gives you back the whole lifetime value at a fraction of normal CAC, because the acquisition is already paid for.

Yet churned customers usually sit untouched in the CRM alongside all the old leads. Industry data points to 70 to 80 percent of contacts in a CRM never getting followed up. Sort your churned customers by LTV segment and reason for churn, and start with the ones who left for reasons that could be fixed, like price, timing or a missing feature you have since built. That is the kind of signal driven follow up Revexa builds Leo for.

Run the numbers on what your existing database is worth in the calculator.

Common questions

What is the difference between LTV and ACV?

ACV is the annual value of a contract. LTV is the total value over the whole customer relationship. A customer with an ACV of 100,000 and a 4 year lifespan has an LTV of 400,000.

Should LTV be based on revenue or margin?

Margin gives the most honest picture, especially if you have per customer delivery costs. Revenue based LTV is fine for quick comparisons between segments.

How do you calculate LTV with few customers and a short history?

Use the churn variant with your best estimate of annual churn, and stay conservative. Update as you get more data. An uncertain LTV is still a better basis for decisions than none.