Most marketing leaders I talk to have their Customer Acquisition Cost (CAC) dialed in.

But that’s only half the story.

Focusing only on the cost to get a customer, without truly knowing what they’re worth, is one of the fastest ways to scale into a loss.

In my 13+ years as a growth marketing strategist, this is the single biggest blind spot I see holding 7-figure businesses back.

It’s like knowing the price of every ingredient but never calculating the total price of the dish you’re selling.

My name is Ian Dionaldo, and I help ambitious companies navigate this exact challenge.

This isn’t just another theoretical article.

This is a hands-on guide built from real-world experience, including helping a tech client transform their funnel to increase customer lifetime value by 35%.

Together, we’re going to walk through how to calculate customer lifetime value accurately, how to use it to make smarter decisions, and how to overcome the common hurdles you’ll face.

TL;DR (Too Long; Didn’t Read)

• What it is: Customer Lifetime Value (LTV) is the total net profit you expect from a single customer over their entire relationship with you. Always use profit, not revenue.

• Why it matters: It tells you how much you can afford to spend on acquiring a customer (CAC). The goal is a healthy LTV:CAC ratio, with 3:1 being the gold standard for sustainable growth.

• How to calculate it: The basic formula is (Average Revenue Per Customer x Contribution Margin) x Average Customer Lifespan.

• How to use it: Don’t just calculate one number. Segment your LTV by marketing channel and customer type to find your most profitable areas and make smarter budget decisions.

How LTV Reveals the True Health of Your Business

Before we get into the spreadsheets, we need to build a solid foundation.

Let’s clarify what LTV is and why it’s a critical metric for sustainable growth.

What exactly is Customer Lifetime Value (LTV)?

In the simplest terms, Customer Lifetime Value (LTV or CLV) is the total net profit your company can expect from an average customer over their entire relationship with you.

The most important word in that sentence is profit.

Many people make the mistake of calculating LTV based on revenue, which is dangerously misleading.

A customer might generate $5,000 in revenue, but if your costs to serve them are $5,500, their LTV isn’t just low—it’s negative.

My advice: Always, always use a profit-based LTV.

(And don’t worry about LTV vs. CLV vs. CLTV; in 99% of conversations, they mean the same thing.)

Why is LTV the other half of the CAC equation?

Think of your business as a simple machine.

You put money in one end (Customer Acquisition Cost – CAC).

Over time, money comes out the other end (Customer Lifetime Value – LTV).

The relationship between these two—the LTV:CAC ratio—is the clearest indicator of your business model’s health.

• LTV:CAC < 1:1 = You’re on a fast track to going out of business.

• LTV:CAC of 1:1 = You’re running on a treadmill, busy but not growing.

• LTV:CAC of 3:1 = This is the gold standard. A healthy, sustainable, and scalable model.

• LTV:CAC of > 5:1 = You’re highly profitable and likely have an opportunity to invest more aggressively in marketing to grow even faster.

I remember working with a B2B SaaS client who celebrated their low CAC.

But when we calculated their LTV, their ratio was a meager 1.5:1.

That single insight shifted their entire marketing strategy from chasing low-cost leads to attracting high-value, long-term partners.

For more on this, click here to check out our agency’s guide to calculating your CAC.

Historic vs. Predictive LTV: Which one should you use?

Historic LTV is the sum of profits from a customer’s past purchases. It’s accurate but looks backward.

Predictive LTV uses your data to forecast a customer’s future value. It’s more complex but infinitely more powerful for making strategic decisions.

My recommendation is simple: Startups begin with Historic LTV and move to Predictive as soon as they have enough data. Established businesses should be running on Predictive LTV.

How to Calculate Customer Lifetime Value (LTV)

Alright, let’s get practical. This is where we translate the concept into a number you can actually use.

The LTV Formulas: From Quick Glance to Precise Figure

Let’s use a hypothetical SaaS company, “DataStream,” to walk through this.

DataStream’s Key Metrics:

• Average Revenue Per Account (ARPA): $200/month

• Contribution Margin: 75%

• Monthly Customer Churn Rate: 4%

1. The Simple LTV Formula (Revenue-Based)