Turning a single period into a lifetime
Lifetime value answers a simple question with surprising leverage: how much profit will an average customer hand you before they leave? The SaaS approach builds the answer from three inputs. Average revenue per user (ARPU) is what a customer pays in one period. Gross margin turns that revenue into profit, so the result measures money you actually keep rather than money that merely passes through. Churn — the fraction of customers who cancel each period — sets how long the relationship lasts. The chain is short but exact: the average customer lifespan is one divided by churn, and LTV is the margin earned per period multiplied by that lifespan.
The LTV formula
Average lifespan = 1 ÷ churn rate
LTV = (ARPU × gross margin %) ÷ churn rate
where ARPU is average revenue per user per period, gross margin converts that revenue into profit, and the churn rate is the share of customers lost each period. Because churn sits in the denominator, lifetime value rises sharply as customers stay longer.
Worked example
Picture a SaaS product charging $100 a month at an 80% gross margin, losing 5% of customers each month, with a $400 cost to acquire each one:
| Step | Amount |
|---|---|
| Revenue per customer (ARPU)what the average customer pays each month | $100 |
| = Margin per monthARPU × 80% gross margin — the profit you actually keep | $80 |
| Average customer lifespan1 ÷ 5% monthly churn | 20 months |
| = Customer lifetime value4× the $400 CAC — above the 3:1 rule of thumb, with acquisition cost paid back in 5 months | $1,600 |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then plug in your own ARPU, margin, and churn.
LTV, CAC, and the ratio that matters
Lifetime value only earns its keep when you set it beside the cost of acquiring a customer. The LTV:CAC ratio is the standard yardstick: a figure around 3:1 is widely regarded as healthy, meaning each customer returns roughly three times what they cost to win. A ratio near or below 1:1 is a warning that you lose money on every customer you acquire, while an unusually high ratio can mean you are under-investing in growth and could profitably spend more. The companion measure is the CAC payback period — the number of months of gross margin it takes to recoup the acquisition cost — which tells you how quickly the investment turns cash positive.
To work the other side of the ratio, estimate acquisition cost with ourCAC calculator. Because retention drives the whole model, it is worth pinning down the rates that feed it using thechurn rate calculatorand theretention rate calculator.
Why churn is usually the biggest lever
- LTV is inversely proportional to churn. Halve the churn rate and you roughly double lifetime value, because the average customer stays twice as long. No equivalent change to price or margin compounds quite so directly.
- Margin matters because LTV is profit, not revenue.Applying gross margin keeps the number honest: two businesses with identical ARPU and churn can have very different lifetime values if one serves customers far more cheaply than the other.
- It is a deliberately simple model. This formula assumes a constant churn rate and constant margin over time, and it ignores discounting of future cash flows as well as expansion revenue from upgrades. Real cohorts rarely behave so neatly, so treat the output as a clear directional estimate rather than a precise forecast.
Frequently asked questions
What is customer lifetime value?
Customer lifetime value (LTV, also written CLV) is the total profit a business expects to earn from a single customer over the entire length of their relationship. Rather than looking at one transaction, it captures the full stream of margin a customer generates before they churn. Because it is forward-looking, LTV is the natural counterweight to acquisition cost: it tells you how much a customer is ultimately worth, which sets the ceiling on what you can sensibly spend to win and keep them.
How do you calculate LTV?
In the common SaaS formulation, LTV equals average revenue per user multiplied by gross margin percentage, divided by the churn rate: LTV = (ARPU × gross margin %) ÷ churn rate. ARPU is the average revenue a customer pays per period, gross margin converts that revenue into actual profit, and dividing by churn extends a single period of margin across the customer’s expected lifespan. The same answer falls out of multiplying margin per period by the average customer lifespan, since lifespan is simply one divided by the churn rate.
What is a good LTV:CAC ratio?
A widely used rule of thumb is that LTV should be roughly three times the cost to acquire a customer — a 3:1 ratio is considered healthy and sustainable. A ratio near or below 1:1 means you are spending as much or more to acquire a customer than you ever earn back, so growth is destroying value. A very high ratio, such as 5:1 or beyond, is not automatically good news: it can signal that you are under-investing in sales and marketing and leaving profitable growth on the table.
How does churn affect LTV?
Churn is usually the single most powerful lever on lifetime value because LTV is inversely proportional to it. Since average customer lifespan equals one divided by the churn rate, cutting churn in half roughly doubles the expected lifespan and therefore doubles LTV, holding margin constant. That is why retention improvements often move the economics more than equivalent gains in pricing or acquisition: a small reduction in the rate at which customers leave compounds across the entire base.
Is this LTV before or after costs?
This calculation is after the direct cost of serving the customer, because it applies the gross margin percentage to revenue. That means the figure represents profit rather than top-line revenue, which is the more meaningful number when comparing against acquisition spend. It does not, however, subtract acquisition cost itself, nor does it account for overhead, discounting of future cash flows, or expansion revenue — so it is a gross-margin lifetime value, not a fully loaded net profit figure.
Disclaimer: This calculator is foreducation and illustration only. The lifetime-value model used here rests on simplifying assumptions — constant churn and margin, no discounting, and no expansion revenue — so the figures it produces are estimates, not guarantees of customer profitability. Nothing here is financial, investment, or business advice.