How to use the LTV calculator
- ARPA. Enter average monthly recurring revenue per account. For customers on annual plans, divide the yearly price by 12.
- Gross margin. The share of revenue left after hosting, third-party software, support and payment fees. Use your income statement figure for subscription revenue if you have it.
- Lifetime. Choose whether to enter monthly churn (the share of customers who cancel each month) or the average lifetime in months. The two are linked: 2% monthly churn is a 50-month average lifetime.
- CAC. Fully loaded sales and marketing spend per new customer; the CAC calculator works it out from your spend.
- Optional refinements. An annual discount rate makes later months count for less, a monthly expansion rate grows revenue from customers who stay, and a lifetime cap stops counting after three, five or ten years.
The chart shows how much gross profit an average new customer has produced by each month, allowing for the chance that it has already cancelled, against a horizontal line at CAC. The table below repeats the calculation for monthly churn from 1% to 10%.
The LTV formulas
Average lifetime = 1 ÷ c
LTV:CAC = LTV ÷ CACc is the monthly churn rate as a fraction. LTV is lifetime gross profit per customer, not revenue.
Break-even month = first month t in which Σk=1…t ARPA × GM × [(1 + e)(1 − c)]k−1 ≥ CACSimple payback assumes the customer stays; the break-even month uses expected gross profit after churn, without discounting.
A worked example
Company B, a fictional SaaS business, charges an average of $150 a month at a 75% gross margin, so each customer produces $112.50 of gross profit a month. With 2.5% monthly churn, customers stay 40.0 months on average.
LTV is $4,500.00. Against a CAC of $1,250, the LTV:CAC ratio is 3.6 : 1, above the 3:1 rule of thumb. CAC would have to rise to $1,500 before the ratio fell to 3:1.
Discounting at 10% a year and adding 0.5% monthly expansion gives a discounted LTV of $4,003.68, a ratio of 3.2 : 1.
Simple payback is 11.1 months, but because some customers cancel along the way, an average new customer only passes CAC in month 13.
Churn moves LTV more than anything else
Because churn sits in the denominator, LTV is very sensitive to it, especially at low rates. Holding every other input at the example values:
| Monthly churn | Average lifetime | LTV | LTV:CAC | Break-even |
|---|---|---|---|---|
| 1.5% | 66.7 months | $7,500.00 | 6.0 : 1 | Month 12 |
| 2.5% (the example) | 40.0 months | $4,500.00 | 3.6 : 1 | Month 13 |
| 4% | 25.0 months | $2,812.50 | 2.3 : 1 | Month 14 |
| 6% | 16.7 months | $1,875.00 | 1.5 : 1 | Month 17 |
Cutting churn from 2.5% to 1.5% raises LTV from $4,500.00 to $7,500.00, the same effect as raising prices by two-thirds, while 6% churn pushes the ratio well below 3:1 at the same CAC. That is why improving retention can be worth as much as winning more customers. It also shows the risk in the formula: a churn rate measured over a few good months can make LTV look far larger than the business has earned. Our churn rate calculator converts customer counts into a monthly rate and shows how a cohort shrinks over time.
Reading the LTV:CAC ratio
The ratio compares what a customer is worth with what it cost to win. Commonly cited rules of thumb:
- Below 1:1. Each customer loses money. Growth makes the problem bigger.
- 1:1 to 3:1. Customers repay their acquisition cost but leave little to fund overhead, product development and profit.
- Around 3:1 or higher. The range usually described as healthy, often paired with a CAC payback under 12 to 18 months.
- Well above 5:1. Sounds good, but can mean the company is underinvesting in sales and marketing and growing slower than it could.
These are guides, not standards. They vary by stage and segment: an early-stage company may accept a lower ratio while it learns which channels work, and businesses with long contracts and low churn can justify a higher CAC. The ratio also says nothing about timing. A 3:1 ratio earned over eight years ties up far more cash than one earned over two, which is why it is best read next to payback.
Simple versus discounted LTV
The simple formula counts a dollar of gross profit in year eight the same as a dollar next month, and it assumes the customer relationship could last indefinitely. Two refinements make the number more conservative:
| Version | LTV | LTV:CAC |
|---|---|---|
| Simple formula | $4,500.00 | 3.6 : 1 |
| Discounted at 10%, no expansion | $3,411.76 | 2.7 : 1 |
| Discounted, with 0.5% monthly expansion | $4,003.68 | 3.2 : 1 |
| Discounted with expansion, 5-year cap | $3,269.61 | 2.6 : 1 |
| Discounted with expansion, 3-year cap | $2,556.82 | 2.0 : 1 |
A three-year cap cuts the ratio from 3.6 : 1 to 2.0 : 1, below the 3:1 line. If you are presenting LTV to investors or using it to set acquisition budgets, the capped and discounted figures are harder to argue with.
What this calculator does not include
- Changing churn over time. Churn is a constant monthly rate. In practice it is often highest in the first months and falls for customers who stay; cohort data captures this better.
- Segments. One average hides differences between small and large customers, channels and plans. Calculate LTV for each segment where the data allows.
- Contraction. Downgrades are not modeled separately; enter a lower or negative expansion rate to reflect them.
- Taxes and fixed costs. LTV uses gross profit, so overhead, R&D and taxes still have to be paid from it.
- Reactivations and referrals. Returning customers and the new customers an existing one refers are not counted.