From monthly revenue per customer, gross margin, and monthly churn rate, estimate a SaaS customer's lifetime value (LTV).
Input Data
Results
At a glance:LTV is the gross-margin-adjusted revenue a customer brings over their lifetime; lifetime is the inverse of the monthly churn rate.
Formula
lifetimeMonths = 1 / monthlyChurnRate%
ltv = arpu × grossMargin% × lifetimeMonths
$$Lifetime = \dfrac{1}{churn}$$$$LTV = \dfrac{ARPU \times GrossMargin}{churn}$$How to Use
- Enter the ARPU and gross margin.
- Enter the monthly churn rate.
- Review the customer lifetime and LTV.
FAQ
Why multiply by gross margin instead of using revenue directly?
Serving a customer has costs (servers, support, delivery). The real value created is the gross profit, not total revenue. Using gross margin makes LTV reflect the customer's true economic contribution and is more conservative and realistic, avoiding overstating what you can afford to spend acquiring them.
How should I read LTV together with CAC?
Divide LTV by customer acquisition cost (CAC). The common healthy threshold is LTV ÷ CAC ≥ 3, meaning each dollar spent acquiring a customer brings at least three dollars of lifetime value. A low ratio means acquisition is too costly or retention too weak; a very high one may mean you are under-investing in growth. They only make sense together.
How much does lowering the churn rate affect LTV?
A lot. Customer lifetime = 1 ÷ monthly churn, and LTV is inversely proportional to churn. Cutting churn from 5% to 2.5% doubles the lifetime (20 to 40 months) and doubles LTV. Improving retention often lifts LTV more than new customer acquisition, making it one of the most effective growth levers.
How do I estimate the churn rate, and what is the difference between customer churn and revenue churn?
Churn is the core input and has several definitions that easily distort LTV. The basic 'customer churn' is lost customers ÷ starting customers in a period (e.g. 50 of 1,000 lost = 5% monthly; average lifetime ≈ 20 months). But 'revenue churn / MRR churn' measures lost recurring revenue, not headcount — a small-customer-heavy month can have lower revenue churn than customer churn, and vice versa. More advanced is 'net revenue churn', which offsets expansion (upsells) against losses; negative net churn (expansion exceeds losses) is the hallmark of top SaaS. Tips: use a consistent period (usually monthly) and definition; average a few months for early-stage noise; and segment by cohort (new customers often churn faster). Keep the ARPU and churn definitions aligned (both customer- or both revenue-based).
Is LTV/CAC alone enough — why is the CAC payback period also important?
LTV/CAC tells whether acquisition is worthwhile in the long run but not how long recovery takes. That is why CAC payback period matters alongside it. LTV/CAC has a blind spot: two firms both at 3 could differ wildly — one recovers CAC in 3 months, the other in 20; the latter ties up cash far longer and risks running dry while scaling. CAC payback = CAC ÷ (ARPU × gross margin), in months; SaaS often targets under 12 months, and above 18–24 months warns of cash strain. Use both: LTV/CAC for long-term unit economics, payback for short-term cash health. A healthy SaaS has both — LTV/CAC ≥ 3 and a short payback. High LTV/CAC but long payback strains growth; fast payback but low LTV/CAC means little long-term profit.
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.