Last updated: 2026-06-23

Customer lifetime value defined

Customer lifetime value (LTV, sometimes written CLV or LTV) is the total gross profit a business expects to earn from one customer across the entire relationship. It answers a single planning question: over the months or years a customer stays, how much value do they actually contribute? Because acquiring customers costs money, LTV is the number that determines how much can be spent winning each one while still running a profitable business.

For subscription and SaaS businesses, LTV depends on three things: how much a customer pays each period, how much of that payment is profit rather than cost, and how long the customer stays before cancelling.

The lifetime value formula

The standard recurring-revenue model combines average revenue per account (ARPU), gross margin, and the monthly churn rate:

Each term plays a distinct role. ARPU is the average monthly revenue from one account. Gross margin scales that revenue down to the portion that is actually profit, after the direct cost of serving the customer. Dividing by the monthly churn rate accounts for how long the customer stays — because the expected lifespan is the inverse of churn:

A 3% monthly churn rate implies an average customer life of $1 / 0.03 \approx 33.3$ months. Halving churn to 1.5% doubles the expected lifespan to about 67 months, which is why retention has such an outsized effect on lifetime value.

Why gross margin matters

A common mistake is to compute lifetime value from revenue alone. Revenue is not value: serving a customer carries real costs — hosting, support, payment processing, and third-party fees — so only the gross-margin slice of each dollar is genuine contribution.

Consider a customer paying $100 a month. At an 80% gross margin, $80 of that is profit and $20 covers the cost of service. Using the full $100 would overstate the customer's worth by 25% and could justify spending more on acquisition than the customer ever returns. The margin-weighted figure is the one to compare against acquisition cost.

Worked example

A SaaS product has an ARPU of $100 per month, a gross margin of 80%, and a monthly churn rate of 3%. The average customer lifespan is:

The lifetime value is:

So each customer is expected to contribute about $2,667 in gross profit over a roughly 33-month relationship. If acquiring that customer costs $800, the LTV:CAC ratio is about 3.3:1 — within the healthy range. If acquisition instead costs $1,500, the ratio falls to about 1.8:1, signalling that the model needs better retention, higher margin, or cheaper acquisition to be sustainable.

Interpreting the result

LTV is rarely judged on its own. Its meaning comes from the comparison with customer acquisition cost (CAC):

A high absolute LTV paired with an even higher CAC is still an unprofitable model. The two figures are always read together, which is why LTV pairs naturally with a Customer Acquisition Cost (CAC) Calculator and an LTV:CAC Ratio Calculator.

Limitations of the constant-churn model

This formula assumes a flat monthly churn rate and a stable ARPU and margin over the customer's life. Reality is messier. Churn is usually highest in the first few months and settles among long-tenured cohorts, so a single blended rate can distort the estimate. Revenue often expands through upgrades and seat growth, or contracts through downgrades, neither of which the simple model captures. For early-stage businesses with little history, churn is also hard to estimate reliably. Treat the output as a planning estimate to inform acquisition budgets, not as a precise forecast of future cash.