In GTM there is far too much focus on new business and the efforts and costs to generate new business. It’s understandable. Everyone wants growth, but that growth also depends on our ability to retain and grow our customers.

We want to know how well we can do that, so we ask ourselves, what is the Lifetime Value (LTV) of a customer? Say our average customer today spends $50,000 per year. How do we estimate the total revenue, on average, we can expect from the customers we have today until they are no longer customers?

The formula is quite simple.

We can also measure “value” by Gross Margin instead of revenue.

We can then compare this number to our Customer Acquisition Cost (CAC) and see if we’re spending too much money, or not enough, to acquire a new customer. (Click here for a deeper dive into these metrics and more in our GTM Metrics & Insights Framework)

If LTV:CAC is 3:1 or more, we’re in a good spot. If it’s higher, we can spend more because we’ll get it back in due time. Or will we? Let’s break this down.

Problem #1: You Can’t Forecast 20-50 Years in the Future

Let’s say our churn is 5%. Based on the formula we can estimate our average customer spending $50,000 per year will spend $50,000 / 5% = $1,000,000 with us over their lifetime.

Does this really check? If you don’t think about it too hard, dividing by 5% is the same as multiplying by 20X, or 20 years. Say we’ve been in business for 10-20 years now and we’re making projections 20 years out? 25 years ago Salesforce and the entire B2B SaaS industry was still unknown to most of us.

But wait, there’s more. If you do the math, after 20 years, we will only have 64% of that $1,000,000. It’s an exponential decay which means, assuming all things stay constant, we will never have $0 revenue from our current customer base. Not in 20 years, 50 years, or even 100.

So tell me, when you’re trying to make critical decisions about your business, do you really want to base it on revenue projections 50 years from now?

Problem #2: Time Value of Money

Let’s say our 5th grade math equation actually holds up and we have $X of revenue from our current customers in 10 years, 20 years, 50 years. Even in this unrealistic scenario, we haven’t factored in the time value of money.

In 20 years time we still have 36% of our revenue from today’s customers ($18,868), but what is that really worth? Our investors expect real returns on their investments, so we should too. If we discount these cash flows at a rate of 10%, barely more than the historic performance of the S&P 500, the $18,868 in revenue we expect in Year #20 is worth $3,085 today and our total revenue is worth $347K today. That’s not even 35% of the way to our $1M LTV calculation!

Problem #3: Assumed Constant Spend

As we make these ridiculous forecasts 5, 10, 20 years into the future, we’re assuming customers will spend the exact same amount of money with us. As our economy goes through booms and busts, as inflation goes up and down, as the industry itself ebbs and flows – will our customers really spend the exact same amount with us year after year?

Problem #4: Expansion Sales Can Go To Infinity

As we’re measuring “value” we’re completely ignoring expansion, or assuming it’s not enough to push past 100% NRR. What if we have a land and expand model? What if our NRR (Net Revenue Retention) is above 100%?

Assuming nothing ever changes, we now have a potentially infinite LTV and LTV:CAC. Every year our customer spends more with us so we can spend $10, $100, $1,000 to acquire $1 of ARR from them because one day we’ll get it all back. All we have to do is convince an investor or bank to fund it!

In other words, we should have no problem going to SoftBank and asking for a $500 Billion investment. We’ll have one slide that shows our NRR is 101% and our LTV is infinity!

LTV Works With EXTREMELY High Churn

So where does this work? It works well with extremely high churn. Say you sell customers on month to month contracts and lose 25% of them every month. By the end of the year you have very little revenue from the customers you had at the start of the year. Suddenly all the issues above go away and looking at LTV is actually more relevant than ARR (which you don’t have) or MRR.

Use CAC Payback or CAC Ratio Instead

But what if we don’t have insanely high churn? What do we do about this? We need to drop LTV and just look at our customer acquisition cost, specifically CAC Payback.

If we spend $1 to acquire a new customer, how many months does it take us to get it back in revenue, or in gross margin? This tells us a lot more about capital efficiency and risk management than a projection that assumes customers stick around forever.

Instead of relying on an LTV calculation that stretches across unrealistic timeframes, companies should focus on CAC Payback Period and CAC Ratio. CAC Payback directly tells us how long it takes to recoup acquisition costs, while the CAC Ratio helps us balance our investment in growth versus profitability. These metrics provide more actionable insights for decision-making and ensure we’re optimizing for both short-term sustainability and long-term success.