Customer Lifetime Value (LTV) tells you how much each customer is worth over their entire relationship with you. Get it right and you make better marketing decisions, smarter product investments, and fund the right growth strategies. Get it wrong and you over- or under-invest in acquisition.

The basic formula (subscription)

LTV = ARPU × Gross Margin × (1 / Churn Rate)

  • ARPU: average revenue per user, monthly.
  • Gross Margin: revenue minus COGS, as a fraction.
  • Churn Rate: percentage of customers who leave each month, as a fraction.
  • 1 / Churn: average customer lifetime in months.

Worked example

SaaS business:

  • ARPU: $50/month
  • Gross margin: 70%
  • Monthly churn: 5%

Lifetime: 1 / 0.05 = 20 months.

LTV: $50 × 0.7 × 20 = $700.

Each customer is worth $700 in gross profit over their lifetime, on average.

Variants by business type

Transactional (e-commerce):

  • LTV = average order value × purchase frequency × customer lifetime.
  • Example: $50 AOV × 4 purchases/year × 5 years = $1,000.

B2B with annual contracts:

  • LTV = annual contract value × gross margin × average customer lifespan.
  • Example: $50k ACV × 70% margin × 5 years = $175k.

Freemium: blended LTV across free and paid users. Most free users contribute zero; paid users contribute high LTV. Calculate paid-user LTV separately and weight by conversion rate.

Why churn matters so much

Lifetime is the inverse of churn. Small changes in churn cause big changes in LTV:

  • Monthly churn 10%: lifetime 10 months.
  • Monthly churn 5%: lifetime 20 months. (Churn cut in half = LTV doubles.)
  • Monthly churn 2%: lifetime 50 months. (LTV 5× the 10% case.)
  • Monthly churn 1%: lifetime 100 months.

This is why reducing churn is the highest-leverage way to grow LTV. Even small reductions compound.

Net revenue retention

Sophisticated SaaS metric:

NRR = (starting MRR + expansion − churn − contraction) / starting MRR × 100.

Above 100% means existing customers grow faster than churn losses. Best-in-class SaaS hits 130%+ NRR.

NRR > 100% means LTV grows over time per customer (upsells outpace churn). NRR < 100% means LTV shrinks.

Cohort vs blended LTV

Blended LTV: average over all customers. Easy.

Cohort LTV: by acquisition month or year. Reveals trends.

If you're improving product/service, recent cohorts should have higher LTV. If degrading, dropping LTV is an early warning.

Discounting future revenue

Strict LTV calculations apply a discount rate (time value of money). $1 today is worth more than $1 a year from now.

Most practical LTV calculations skip this for simplicity. The undiscounted number is fine for relative comparisons.

For investment decisions, discount future cash flows by 10–15% per year (typical capital cost).

Customer lifetime "real" vs "expected"

Expected lifetime: 1 / churn rate. Mathematical average.

Real lifetime: actual time from acquisition to churn for each customer. Many will leave fast (early churn); a few will stay forever.

The distribution matters. A high churn rate may come from a few rapid-churners and many sticky customers. Median lifetime can be much higher than expected.

Common LTV mistakes

1. Using revenue instead of gross profit. Revenue × lifetime overstates true value. Always include gross margin.

2. Ignoring transaction costs. Payment processing fees, customer support costs, refunds — these reduce true LTV.

3. Treating all customers as equal. Enterprise customers have higher LTV than freemium. Calculate by tier or segment.

4. Calculating LTV but not validating. Forecast vs actual. Actual lifetime can differ from theoretical 1/churn.

5. Using monthly churn for annual subscriptions. Annual subscribers have lower effective churn (they paid for a year).

Segmented LTV

Different customer types have different LTVs:

  • Free trial users who convert: $X LTV.
  • Inbound organic signups: $Y LTV.
  • Paid acquisition customers: $Z LTV.
  • Referrals: typically highest LTV.

Segment by acquisition source for marketing decisions.

Industry benchmarks

Typical LTV ranges:

IndustryLTV range
SMB SaaS$500–5,000
Enterprise SaaS$50k–500k
Mobile gaming$5–50
E-commerce (typical)$300–1,000
Subscription box$200–800
Banking customer$3,000–10,000

Building a LTV model

For a serious model:

  1. Define cohorts (by acquisition month).
  2. Track each cohort's monthly retention.
  3. Calculate average lifetime from observed retention curve.
  4. Apply ARPU and gross margin to get LTV.
  5. Aggregate cohorts to get business-wide average.

This requires good analytics infrastructure but produces the most accurate LTV. Most companies start with formula-based LTV and graduate to cohort-based as analytics mature.

Customer success vs LTV

The most leverage on LTV is customer success — getting customers value so they stay longer.

  • Better onboarding
  • Proactive support
  • Product-led growth (in-app guidance)
  • Account managers for high-value customers
  • Renewal management

$50/month customer who stays 5 years = $3,000. Same customer churning at 1 year = $600. Customer success is the difference.

Calculate your LTV

Our LTV calculator takes ARPU, churn, and gross margin and returns LTV plus the LTV:CAC ratio. Useful for benchmarking and tracking improvement over time.