L, T, and V come together in this spoonful of our favorite acronym-laden series. Together they mean Lifetime Value of a customer or client.
If your business is one-and-done then the lifetime value of a customer will be easy to measure. If instead you have repeat customers their value may become a bit more complicated to reach.
Essentially LTV can be measured as all the money a customer is likely to spend with your business over the lifetime of your relationship. For some businesses this will be evident and clear, while others may need to spend some serious effort to figure out this number. If your business is new and built on recurring revenues it may be difficult to ascertain how long a typical customer will stay with you, making the number a bit of a guess. If this is the case it is worthwhile to calculate the number twice: once based on your assumptions about the lifespan of customer relationships as you expect them to turn out as well as the lifespan so far proven. For example, if you've been in business for three months you should calculate LTV with a 3 month customer lifetime as well as the anticipated lifetime. As time marches on this number will become more accurate.
Knowing this number alongside the Customer Acquisition Cost (CAC) is important for figuring out the long-term viability of your business, especially if it is a SaaS offering. The LTV/CAC ratio can be a quick guideline for whether or not your business is on a path toward growth or destruction.
A higher LTV/CAC ratio means growth, while a ratio of less than 1 indicates that the cost of acquiring new customers is greater than the value that customer brings to your business. Generally speaking a ratio of 3/1 is considered good, especially if you are seeking funding for your business.