How to Calculate LTV (Customer Lifetime Value)

The formula and a worked example

LTV equals ARPU times gross margin, divided by 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 divided by 0.04, or 25 months. LTV is $24 times 25, which is $600.

Two mistakes that quietly break this number

• Using revenue instead of gross profit. Hosting, API costs, and payment fees are real and should come out first
• Trusting the churn-based lifetime estimate too early. New products have too little data for a stable churn number, so a young product's implied 25 or 50-month lifetime is optimistic

A practical fix for the second problem: cap the assumed lifetime at something defensible, like 24 to 36 months, until you have enough history to trust the churn-implied number.

Why LTV alone does not tell you much

LTV only becomes a decision-making number once you compare it to CAC, your customer acquisition cost. A commonly cited rule of thumb is an LTV to CAC ratio of at least 3 to 1. Below that, growth burns cash faster than it returns it. Because churn sits in the denominator of LTV, cutting churn in half doubles LTV without touching pricing or acquisition at all, usually the cheapest lever available.