Formula
LTV = ARPU * Gross Margin % / User Churn Rate %
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About LTV Calculator
Customer Lifetime Value (LTV) estimates the total gross profit a business can expect to earn from a single customer over the entire duration of their subscription. It combines three inputs — average revenue per user (ARPU), gross margin, and churn rate — into a single number that answers the question: how much is one customer actually worth?
LTV is most useful as a comparative and decision-making tool. It answers questions like how much a business can afford to spend acquiring a customer (LTV:CAC ratio), which customer segments generate the most long-term value, and whether current pricing is efficient relative to the value being created.
Benchmarks
LTV on its own is not very informative — what matters is LTV relative to the cost of acquiring a customer, the LTV:CAC ratio. A ratio between 3:1 and 5:1 is generally considered healthy for sustainable SaaS growth; below 3:1 suggests acquisition may not be capital-efficient, while ratios above 8:1 sometimes indicate under-investment in growth.
A critical distinction: this simplified LTV formula assumes churn rate stays constant over the customer's lifetime, which overstates LTV for cohorts where churn is front-loaded (customers who leave early cancel out disproportionately). Cohort-based LTV calculated from actual payment history is more accurate than the formula version for financial planning.
Frequently Asked Questions
What is a good LTV:CAC ratio?
A ratio between 3:1 and 5:1 is the widely-cited healthy range for sustainable SaaS growth. Below 3:1 suggests the business is not capital-efficient in acquiring customers. Above 8:1 can actually signal under-investment — the business could likely grow faster by spending more on acquisition while maintaining a healthy ratio.
Why does the LTV formula use gross margin, not revenue?
Using raw revenue overstates value because it ignores the cost of serving each customer (infrastructure, support, hosting). Multiplying ARPU by gross margin gives the actual profit generated per customer, which is what a business can spend on acquisition and still remain profitable.
Is this LTV formula accurate for all SaaS businesses?
It is a useful approximation, not a precise cohort calculation. It assumes constant churn rate over the customer lifetime, which understates risk for businesses where early-cohort churn is much higher than steady-state churn. For financial planning and investor reporting, cohort-based LTV calculated from actual payment history is more reliable.
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