Customer Lifetime Value

What it measures

CLTV multiplies the average annual gross margin per live customer (ARPA × gross margin %) by a fixed 5-year lifetime. It deliberately strips out churn risk: it uses only live (current) ARR and assumes every active customer holds their current run-rate, at current margin, for five years. The output is profit dollars per customer, not revenue.

Why it matters

CLTV is the simplest defensible answer to "what is a customer worth to us?" You build CAC budgets, payback targets, and go-to-market models on top of it. Investors lean on it because, unlike churn-based LTV, it rests on current operational data rather than a forecast — so it survives diligence with fewer arguments.

How to read it

Read CLTV against your CAC, never in isolation. A higher CLTV means each customer is worth more in gross-margin dollars over their life. The headline test is the CLTV-to-CAC ratio: at 3x, you recover acquisition cost in margin within roughly a third of the assumed lifetime and profit on the rest. If CLTV falls, decompose it — either ARPA is shrinking (downsell, churn of large logos) or gross margin % is eroding (rising COGS). Always sanity-check the 5-year assumption against your actual cohort retention curves: if customers rarely make it past year two, the proxy is flattering you.

What good looks like

Watch-outs

• Forgetting CLTV bakes in 5 years and zero churn. If real lifetimes are two years, you are overstating value by roughly 150%. Always pair CLTV with actual cohort retention and renewal rates.
• Treating CLTV as revenue. It is gross-margin dollars net of direct COGS, not ARR or bookings — using it as top-line inflates every downstream model.
• Judging CLTV on the ratio alone while ignoring payback horizon. A $10K CLTV against a $9K CAC only works if churn stays very low; a long payback with rising churn is a trap.
• Conflating live CLTV with contracted CLTV (CCLTV). CLTV uses current run-rate; CCLTV uses signed contracts and is the more conservative read.

Worked example