What it means
LTV is the projected revenue from a customer over the entire time they remain a customer. For subscription businesses, it is calculated as: average monthly revenue per customer divided by monthly churn rate. For one-time-purchase businesses, it is the average order value times the average number of repeat purchases.
Most LTV calculations include only revenue, but some include gross profit (revenue minus direct costs). The latter is more useful for unit economics; the former is easier to calculate.
Why it matters
LTV is the upper bound of what you can spend to acquire a customer. If your average customer is worth $1,000 over their lifetime, spending $1,200 to acquire them is irrational. Spending $200 is healthy. Spending $50 means you are leaving growth on the table.
LTV is also how you justify investing in customer success, retention, and upsell programmes. A 10 percent reduction in churn can do more for LTV than a 10 percent increase in acquisition rate.
Example
A SaaS brand has an average revenue per account of SGD 200 a month and a 4 percent monthly churn rate. LTV equals 200 divided by 0.04 = SGD 5,000. Their CAC is SGD 800. LTV/CAC equals 6.25x, well above the healthy 3x rule. They have room to invest more aggressively in acquisition.