What lifetime value tells you
Customer lifetime value (LTV or CLV) is the gross profit a customer brings in from their first payment to the day they leave. Set against the customer acquisition cost (CAC), it answers the central question of a subscription business: is it worth paying this much to win a customer? The calculator uses the standard SaaS model, where a constant share of customers cancels each month.
The formulas
- Monthly gross profit per customer = average revenue per customer (ARPU) × gross margin
- Average lifetime = 1 ÷ monthly churn
- LTV = monthly gross profit ÷ monthly churn
- LTV:CAC ratio = LTV ÷ CAC
- CAC payback = CAC ÷ monthly gross profit
- Annual churn = 1 − (1 − monthly churn)^12
Worked example
A software company charges $50 a month with an 80% gross margin. 3% of customers cancel each month, and it costs $400 in marketing and sales to win one.
- Gross profit per customer: $50 × 80% = $40 a month.
- Average lifetime: 1 ÷ 0.03 = 33.3 months.
- LTV = $40 ÷ 0.03 = $1,333 (lifetime revenue is $1,667).
- LTV:CAC = 1,333 ÷ 400 = 3.33, and the CAC is earned back in 10 months.
- A 3% monthly churn means losing about 31% of customers a year.
Churn is the biggest lever
| Monthly churn | LTV | LTV:CAC |
|---|---|---|
| 1% | $4,000 | 10.0 |
| 2% | $2,000 | 5.0 |
| 3% | $1,333 | 3.3 |
| 5% | $800 | 2.0 |
| 10% | $400 | 1.0 |
Cutting churn from 3% to 2% raises LTV by half, which is often cheaper than raising prices or lowering CAC.
Benchmarks
- LTV:CAC of 3 or more is the usual target for a sustainable SaaS business. Below 1, each new customer destroys value.
- CAC payback under 12 months is considered healthy; enterprise software often accepts 18 to 24 months.
- A very high ratio, above 5, can mean you are under-investing in growth.
Limits of the formula
The constant-churn model assumes every customer has the same chance of leaving each month. In reality, churn is highest in the first months and lower for loyal customers, and revenue per customer can grow through upgrades. For a more prudent figure, cap the lifetime at three to five years or discount future profit. Calculate CAC with all sales and marketing costs, not just ad spend: the ad metrics calculator gives the cost per acquisition of a single campaign.