How to Calculate Customer Lifetime Value (LTV)
The two formulas
Lifetime value has two common forms that give the same answer. Both measure profit, not revenue, so gross margin is always part of the calculation.
When you run a subscription business, average lifespan is the inverse of your churn rate, so the formula collapses to a churn-based version that is easier to keep current:
What each input means
- ARPA: average revenue per account over a chosen period (monthly or annual). Keep the period consistent with your churn period.
- Gross margin: revenue minus the cost of serving the customer (hosting, support, payment fees), expressed as a percentage.
- Average lifespan: how many periods a customer stays, in the same unit as ARPA. Equals 1 ÷ churn rate.
- Churn rate: the share of customers (or revenue) lost each period.
Calculate it step by step
Work through these five steps in order. Decide your period, monthly or annual, at the start and use it for every input.
- Find ARPA. Divide total recurring revenue for the period by the number of active accounts in that period.
- Apply gross margin. Multiply ARPA by your gross margin percentage to get profit per account per period.
- Measure churn or lifespan. Calculate the share of accounts lost each period. Lifespan = 1 ÷ churn rate.
- Multiply through. Per-period gross profit × lifespan, or divide per-period gross profit by churn rate.
- Sanity-check against CAC. Divide LTV by customer acquisition cost to get the LTV:CAC ratio you will actually act on.
A worked example
A SaaS product charges $100/month per account, runs an 80% gross margin, and loses 4% of customers per month:
- Gross profit per month = $100 × 80% = $80
- Average lifespan = 1 ÷ 4% = 25 months
- LTV = $80 × 25 = $2,000
The same result drops out of the churn formula: ($100 × 80%) ÷ 0.04 = $2,000. If acquiring that customer costs $500, the LTV:CAC ratio is 4:1, comfortably above the common 3:1 health line.
Pair LTV with CAC
LTV is only useful next to customer acquisition cost. On its own it is a vanity figure; the ratio tells you whether growth is profitable.
| LTV:CAC ratio | Common reading |
|---|---|
| Below 1:1 | You lose money on each customer, which is unsustainable |
| Around 3:1 | A frequently cited healthy benchmark for subscriptions |
| Above 5:1 | Often a sign you are under-investing in growth |
Treat these as rules of thumb, not laws. The right ratio depends on your margin, your CAC payback period, and how aggressively you are funding growth.
Caveats to watch
- Use margin, not revenue. Revenue-only LTV overstates value and breaks the CAC comparison you build it for.
- Churn dominates the answer. Because lifespan is 1 ÷ churn, small churn errors swing LTV wildly. Measure churn carefully and consistently.
- Segment it. A blended LTV hides that enterprise and self-serve customers behave nothing alike. Calculate by cohort or plan where you can.
- Mind discounting. The simple formulas ignore the time value of money. For long lifespans, apply a discount rate so distant revenue is not overvalued.
- Account for expansion. If customers upgrade over time, flat ARPA understates value; use net revenue retention to capture it.
Frequently asked questions
What is the simplest formula for LTV?
The simplest gross-margin formula is LTV = average revenue per account × gross margin × average customer lifespan in periods. For subscription models you can swap lifespan for 1 ÷ churn rate, giving LTV = (ARPA × gross margin) ÷ churn rate. Both estimate the total gross profit a customer delivers; neither discounts for the time value of money on its own.
Should LTV use revenue or gross margin?
Use gross margin, not raw revenue. Lifetime value is meant to measure profit, so multiplying by gross margin strips out the cost of serving the customer: hosting, support, payment fees. Revenue-only LTV overstates value and breaks the LTV-to-CAC comparison you build it for.
What is a good LTV-to-CAC ratio?
A widely cited rule of thumb is 3:1 as healthy for subscription businesses, with much above 5:1 a sign you may be under-investing in growth and below 1:1 unprofitable. These are guidelines, not laws. The right ratio depends on margin, payback period, and growth stage.
How does churn affect lifetime value?
Churn is the single biggest lever. Average lifespan equals 1 ÷ churn rate, so cutting monthly churn from 5% to 2.5% roughly doubles expected lifespan and therefore LTV. Because LTV is so sensitive to churn, small measurement errors in churn produce large swings in the result.
Last updated: 14 June 2026