Customer Lifetime Value (LTV) — sometimes called CLV — estimates the total gross profit a single customer will generate over the entire time they remain a customer. Combined with Customer Acquisition Cost (CAC), it tells you whether your business is sustainable.
The Standard LTV Formula (SaaS)
LTV = (ARPU × Gross Margin %) ÷ Churn Rate
Where:
- ARPU — Average Revenue Per User per period (usually monthly).
- Gross Margin % — revenue minus cost of goods sold (servers, support, payment fees) as a percentage.
- Churn Rate — percentage of customers who cancel each period.
This formula assumes constant ARPU, constant margin and constant churn — a simplification that works well at the unit-economics level.
Worked Example
A SaaS product has:
- ARPU = $50/month
- Gross Margin = 80%
- Monthly Churn = 3%
LTV = ($50 × 0.80) ÷ 0.03 = $40 ÷ 0.03 = $1,333
If CAC = $400, the LTV:CAC ratio is 1,333 ÷ 400 = 3.3 — within the healthy 3–5× range. Use the LTV Calculator and the CAC Calculator to model your own numbers.
Why Churn Drives Everything
LTV is enormously sensitive to churn because churn appears in the denominator. Halving churn doubles LTV.
| Monthly Churn | Implied lifetime | LTV (ARPU × Margin = $40) |
|---|---|---|
| 5% | 20 months | $800 |
| 3% | 33 months | $1,333 |
| 2% | 50 months | $2,000 |
| 1% | 100 months | $4,000 |
This is why reducing churn — even by half a point — almost always beats acquiring more customers.
More Sophisticated LTV Models
The textbook formula is a useful baseline but tends to overstate LTV. Three refinements:
- Cap the time horizon. Many operators cap LTV at 36 or 60 months because cohort behaviour beyond that is unknowable.
- Use cohort-based LTV. Track the actual gross profit each acquisition cohort produced over time rather than projecting.
- Discount future cash flows. The "true" LTV is the NPV of future gross profit, discounted at your cost of capital. For early-stage SaaS this typically reduces LTV by 15–25%.
Net vs Gross LTV
- Gross LTV uses revenue.
- Net LTV uses gross profit (revenue × gross margin).
Investors and operators almost always mean net LTV. Using gross LTV with a CAC ratio is misleading because CAC is real dollars spent, not revenue.
LTV in the LTV:CAC Ratio
LTV:CAC ≥ 3:1
The classic 3:1 rule comes from the observation that healthy SaaS companies recover CAC in <12 months and earn 2–3× more after that. Use the AI SaaS ROI Calculator to see how the ratio plays out across multiple cohorts.
How to Grow LTV
- Reduce churn. Better onboarding, proactive support, churn-risk scoring.
- Raise ARPU. Annual plans, usage-based pricing, expansion features.
- Improve gross margin. Move to autoscaling infra, reduce support cost per ticket.
- Cross-sell adjacent products. A 110% net revenue retention business almost cannot help but grow.
- Move upmarket. Larger customers churn less and pay more.
Common Mistakes
- Using gross revenue instead of gross profit. Standard LTV is post-margin.
- Annualising monthly churn linearly. Annual churn is 1 − (1 − monthly churn)^12, not monthly churn × 12.
- Ignoring negative churn / expansion. If existing customers upgrade faster than they cancel, LTV is higher than the formula suggests.
- Comparing LTV computed differently. A company quoting an uncapped LTV against an industry benchmark capped at 36 months will look artificially strong.
- Forgetting payment-processor fees. Stripe and similar processors eat 2–4% of revenue.
Frequently Asked Questions
What is a "good" LTV? Only meaningful when paired with CAC. The LTV:CAC ratio is the real signal.
How do I calculate LTV for a freemium product? Compute LTV on the paid cohort only. Free users dilute every metric.
Should LTV include discounts and credits? Yes — net them out of ARPU so LTV reflects realised revenue, not list price.
Is LTV the same as CLV? Yes — different acronyms, same metric.
Related Calculators
Conclusion
LTV is your customer's economic value to the business. Compute it on gross profit, cap the time horizon, and watch churn — because that single variable determines almost everything. Together with CAC, LTV tells you whether your growth machine is creating value or destroying it.
Educational only. Benchmarks vary by industry; always validate with your own cohort data.