Customer Lifetime Value (LTV) Calculation
How to calculate and optimize customer lifetime value for your SaaS business.
What is LTV?
Customer Lifetime Value (LTV) is the total revenue you expect from a customer over their entire relationship with you. It informs how much you can spend to acquire and retain them (CAC, retention budgets) and how to segment and price.
Basic LTV Formula
Simple form: LTV = ARPU ÷ Churn rate (with churn as a decimal). Example: $50/month ARPU, 5% monthly churn → LTV = 50 ÷ 0.05 = $1,000. For more accuracy, use: LTV = (ARPU × Gross margin) ÷ Churn rate, so LTV is in gross profit terms. If you have expansion, use a multi-year model or cohort-based LTV that includes expansion and contraction.
LTV:CAC Ratio
Compare LTV to Customer Acquisition Cost (CAC). LTV:CAC of 3:1 or higher is often cited as healthy; below that, you may be overspending on acquisition. Improve LTV by reducing churn, increasing ARPU, or growing expansion; improve the ratio by lowering CAC or increasing LTV.
Using LTV in Practice
Segment LTV by plan, cohort, or source to see where value is highest. Use LTV to set CAC targets, prioritize retention and success, and evaluate pricing and packaging. Recalculate periodically as churn and ARPU change.