Enter ARPU, gross margin, and monthly churn to see lifetime value.
How the LTV formula works
The standard formula: LTV = (ARPU x gross margin) / monthly churn rate. Worked example: $30 ARPU at 80 percent gross margin gives $24 of gross profit per customer per month. At 4 percent monthly churn, the average customer stays 1 / 0.04 = 25 months. So LTV is $24 x 25 = $600.
Two details people miss. First, use gross profit, not revenue: hosting, LLM API costs, and payment fees are real, and an LTV computed on raw revenue flatters every downstream decision. Second, the formula assumes churn is roughly constant over a customer's life, which is optimistic for young products where most churn happens in the first months. Treat early LTV numbers as estimates, not accounting.
Why LTV matters
LTV answers one question: what is the most you can afford to pay for a customer? Paired with CAC (customer acquisition cost), it turns growth from a hope into arithmetic. A commonly cited rule of thumb is an LTV to CAC ratio of at least 3 to 1. Below that, growth burns cash. Dramatically above it, you may be underinvesting in acquisition.
The payback period completes the picture: CAC divided by monthly gross profit per customer tells you how many months until a new customer has paid back their own acquisition cost. Commonly cited guidance is under 12 months for self-funded companies, since every month of payback is cash you have to float.
Because churn sits in the denominator, LTV is extremely sensitive to retention. Cutting monthly churn from 4 percent to 2 percent doubles LTV without touching pricing or acquisition. That is usually the cheapest growth available.
Benchmarks, honestly
Gross margins for SaaS typically land between 70 and 90 percent; products with heavy AI inference costs often sit lower until usage is optimized. For LTV itself there is no universal benchmark, because it scales with price point: a $9 a month tool and a $500 a month platform have wildly different LTVs and both can be great businesses. The ratios (LTV to CAC of about 3, payback under about a year) travel better across price points than absolute numbers do.
Frequently asked questions
What is the formula for customer lifetime value?
LTV equals ARPU times gross margin divided by monthly churn rate. Equivalently, monthly gross profit per customer times average customer lifetime in months, where lifetime is 1 divided by the monthly churn rate.
What is a good LTV to CAC ratio?
A commonly cited target is 3 to 1 or better, meaning a customer generates at least three times what it cost to acquire them. Under 3 the economics are fragile; far above it, some teams take that as a sign they could be spending more on growth.
Should LTV use revenue or gross profit?
Gross profit. Hosting, API costs, and payment processing fees come out of every subscription dollar before it can pay for anything else. LTV computed on raw revenue overstates what you can afford to spend on acquisition, which is exactly the decision LTV exists to inform.
Why is my LTV unrealistic when churn is very low?
Because churn is the denominator, tiny churn rates produce huge LTVs: at 0.5 percent monthly churn the formula claims a 200 month lifetime. If your product is young, you simply do not have the data to support that. Cap the lifetime at something defensible, like 36 months, when making spending decisions.
How do I find my monthly churn rate for this calculator?
Divide the customers you lost last month by the customers you had at the start of it. Our free churn rate calculator does this, including revenue churn and annualized churn, and links back here so you can carry the number over.
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