What is LTV?
The LTV calculator above estimates Customer Lifetime Value — the total gross-margin revenue a customer generates before they churn. Customer Lifetime Value estimates the total gross-margin revenue a customer generates before they churn. It is the lens through which every acquisition, pricing, and retention decision should be evaluated: if you do not know what a customer is worth over their lifetime, you cannot know how much it makes sense to spend to acquire or retain them.
LTV is not the same as total revenue per customer. It is a gross-margin figure — revenue minus the cost to deliver the service — because that is the amount actually available to fund acquisition spending, R&D, and company profit. A customer paying $100/month for a product with 50% gross margins is worth $50/month in free cash flow terms, not $100/month. Confusing revenue LTV with gross-margin LTV leads to overpaying for customer acquisition and underestimating the capital required to sustain growth.
LTV occupies a central position in the SaaS metrics framework. It is the numerator in the LTV:CAC ratio, the metric that determines whether your unit economics are sustainable. It is also the theoretical ceiling on how much you should spend to retain a customer: investing up to LTV in retention is break-even; investing less than that is profitable. Most businesses set retention investment thresholds at some fraction of LTV — often 10–20% of LTV per customer per year — to ensure the math works at scale.
LTV also interacts directly with your pricing and gross margin strategy. Increasing ARPU by 20% increases LTV by 20%. Reducing monthly churn from 5% to 2.5% doubles LTV. Improving gross margin from 70% to 80% increases LTV by roughly 14%. Understanding these relationships tells you which lever to pull first — and reducing churn is almost always the highest-leverage move because of its position in the denominator.
The formula
LTV = (Monthly ARPU × Gross Margin %) / Monthly Churn Rate- Monthly ARPU — Average Revenue Per User per month in dollars. This is the average monthly billing amount across your active customer base, including all tiers and plans.
- Gross Margin % — the percentage of revenue remaining after the direct cost of service delivery (infrastructure, support, third-party API costs). A typical SaaS gross margin is 70–85%. Enter this as a whole number (e.g., 80 for 80%).
- Monthly Churn Rate — your monthly customer churn rate as a percentage. A 5% monthly churn rate is entered as 5 (the calculator handles the division by 100 internally).
The formula derives from the expected customer lifetime, which equals 1 / churn rate. Multiply that lifetime by monthly gross-margin revenue to get LTV.
Why gross margin matters: Two businesses with the same ARPU and churn will have very different LTV if their gross margins differ. A hardware-attached SaaS business with 50% gross margins has half the LTV of a pure-software business with the same revenue — and therefore can only rationally spend half as much on CAC while maintaining the same LTV:CAC ratio.
Worked example
An ARPU of $100/month, gross margin of 80%, and monthly churn rate of 5%:
($100 × 80%) / 5% = $80 / 0.05 = $1,600 LTVThis customer is worth $1,600 in gross-margin revenue over their lifetime. If your CAC is $500, your LTV:CAC ratio is 3.2:1 — solidly above the 3:1 benchmark.
A special case worth noting: a 0% churn rate represents an unbounded (infinite) lifetime, which the calculator shows as a dash ”—” rather than a dollar figure. In practice, every business has some non-zero churn, but if yours is genuinely very low (say, 0.1% monthly), the formula produces extremely large numbers that may not be operationally meaningful for near-term decisions.
What changes if churn drops to 2.5% while keeping all other inputs the same?
($100 × 80%) / 2.5% = $80 / 0.025 = $3,200 LTVCutting monthly churn in half doubles LTV from $1,600 to $3,200. At that LTV, a CAC of $500 produces an LTV:CAC ratio of 6.4:1 — well above the 3:1 minimum and suggesting the business could afford to invest more in acquisition. This is why churn reduction is often the highest-ROI lever available to an early-stage SaaS business.
Alternatively, if ARPU increases from $100 to $150 while churn and gross margin stay the same:
($150 × 80%) / 5% = $120 / 0.05 = $2,400 LTVA 50% increase in ARPU produces a 50% increase in LTV — a proportional relationship. Churn reduction, by contrast, has a non-linear effect because it changes the denominator, which creates exponentially larger LTV at very low churn rates.
Benchmarks
LTV:CAC ratio is the most actionable LTV-derived benchmark. A ratio of 3:1 is the standard minimum for efficient SaaS growth; below 1:1 the business is structurally unprofitable at the unit level. Enterprise SaaS with high gross margins (80–85%) and low churn (0.5% monthly or less) routinely achieves LTV of $10,000–$100,000+ per customer. SMB SaaS products with 5% monthly churn and $50 ARPU produce an LTV around $700–$800, which is workable only if CAC is below $250.
LTV:CAC ratio benchmarks by segment:
- Enterprise SaaS: LTV:CAC of 3–6:1 is typical; the high CAC is justified by very high LTV from long contracts, high ARPU, and low churn.
- Mid-market SaaS: LTV:CAC of 3–5:1 is the target range.
- SMB / PLG: LTV:CAC of 3–8:1 is achievable because self-serve acquisition is cheap; the challenge is keeping LTV high enough given higher churn in this segment.
- Consumer: LTV:CAC of 2–4:1 is acceptable; many consumer businesses operate on thinner margins but compensate with high volume.
How to interpret and improve it
LTV is improved by moving any of three levers: increasing ARPU, improving gross margin, or reducing churn. Of these, reducing churn typically has the most dramatic effect because it appears in the denominator — cutting monthly churn from 5% to 2.5% doubles LTV, whereas doubling ARPU only doubles LTV proportionally.
Gross margin improvements — negotiating better infrastructure costs, reducing support load through self-service, or improving operational efficiency — compound silently but consistently. Every 5 percentage points of gross margin improvement at $1M ARR adds $50,000 in annual gross profit, and that same improvement raises LTV for every customer in the base.
When using LTV to evaluate acquisition decisions, apply a realistic time horizon. Most SaaS businesses use an 18–36 month LTV cap for investment decisions rather than a theoretical infinite LTV, because the further out you project, the less reliable the estimate. An LTV:CAC payback of 12 months on a 24-month capped LTV is a much more conservative — and defensible — framework than relying on a 10-year theoretical number.
When LTV can mislead you: The formula assumes a constant churn rate over the customer’s lifetime. In reality, churn is not constant — early-tenure customers often churn at higher rates, while customers who survive past 12 months are frequently much stickier. If your cohort data shows this pattern, the formula-based LTV underestimates the true value of long-tenured customers and may cause you to underinvest in the retention and onboarding that gets customers through the first 90 days. Using cohort-level LTV curves rather than a single formula-based estimate gives a more accurate picture for investment decisions.
Frequently asked questions
What is LTV? Customer Lifetime Value estimates the total gross-margin revenue a customer generates before they churn.
How is LTV calculated here? Multiply monthly ARPU by your gross margin percentage, then divide by your monthly churn rate percentage. The calculator converts the percentages automatically, so enter them as whole numbers (for example, 80 and 5). A 0% churn rate implies an unbounded lifetime, shown as a dash.