Lifetime Value (LTV), or customer lifetime value, is the total cumulative net revenue that a company can expect to generate from a single customer over the entire duration of the business relationship. It is one of the most strategic metrics for subscription-based and recurring-revenue businesses, as it measures the long-term economic value of each customer acquired and directly conditions the acceptable level of customer acquisition investment.

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The standard formula is: LTV = Average Revenue Per Account (ARPA) × Gross margin % / Churn rate. A company with ARPA of CHF 1,200/year, gross margin of 75% and annual churn of 10% has an LTV of CHF 1,200 × 75% / 10% = CHF 9,000. This means each customer generates an expected net contribution of CHF 9,000 over their lifetime with the company.

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The LTV/CAC ratio (Customer Acquisition Cost) is the profitability indicator most scrutinised by venture capital investors: a ratio of 3x or above indicates an efficient commercial model. Below 1x, the company spends more to acquire customers than they will ever generate — a structural loss that no growth rate can compensate long-term.

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In SaaS company valuation, LTV is used to model long-term cash flows and validate the sustainability of ARR growth projections. High LTV with low churn justifies premium ARR multiples in fundraising and M&A transactions.

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Example: a Swiss SaaS platform shows ARPA of CHF 18,000/year, gross margin of 72% and annual churn of 8%. LTV = 18,000 × 72% / 8% = CHF 162,000. CAC is CHF 32,000. LTV/CAC = 5.1x — an excellent ratio indicating high commercial model efficiency and justifying an aggressive growth investment strategy.

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At Hectelion, we model LTV and LTV/CAC in our SaaS company valuations and due diligences to assess the long-term economic quality of the client base.