What is Customer Lifetime Value (LTV)?

LTV is the total gross profit a business expects to earn from a single customer over the entire relationship. The standard formula is LTV = ARPU x Gross Margin / Monthly Churn Rate. A higher LTV relative to what it cost to acquire the customer (CAC) means the business has healthy unit economics.

What is the LTV formula used here?

Simple LTV = ARPU x Gross Margin / Monthly Churn Rate. This assumes a constant churn rate and gives the expected gross profit per customer. The optional NPV version is LTV = (ARPU x Margin) / (monthly discount rate + monthly churn), where monthly discount rate = (1 + annual rate)^(1/12) - 1. Both are standard industry models.

What is a good LTV:CAC ratio?

The widely-used benchmark is 3:1 — you earn three dollars of lifetime value for every dollar spent acquiring the customer. Below 1:1 means the business is losing money on every customer; 1-3:1 is marginal; 3:1 and above is considered healthy; above 5:1 can signal under-investment in growth.

How do I calculate CAC payback period?

CAC payback (in months) = CAC / (ARPU x Gross Margin). It tells you how many months of gross profit are needed to recover the acquisition cost. SaaS benchmarks typically target under 12 months for SMB products and under 18 months for enterprise.

What monthly churn rate is healthy for SaaS?

For SMB SaaS, monthly churn between 1-3% is considered acceptable; under 1% is excellent. Enterprise SaaS often targets under 0.5% monthly. At 5% monthly churn, the average customer lifetime is just 20 months (1 / 0.05); at 1% it extends to 100 months.

Why does a small churn improvement have such a large effect on LTV?

Because LTV = Gross Profit / Churn, churn sits in the denominator. Halving churn from 4% to 2% doubles LTV. This non-linear sensitivity is why retention investment typically yields higher returns than equivalent acquisition spend once a product has achieved product-market fit.

Customer Lifetime Value Calculator

The Customer Lifetime Value calculator tells you exactly how much gross profit you can expect from a typical customer over their entire relationship with your business. It uses the industry-standard formula — ARPU times gross margin divided by monthly churn — and extends it with an optional NPV (net present value) discount-rate adjustment and a full CAC payback analysis. Everything runs in your browser; no data is sent anywhere.

How it works

Three inputs drive the core LTV figure:

ARPU — average monthly revenue per active user (MRR ÷ active subscribers for a SaaS product, average order value × purchase frequency for a transactional business).
Gross margin — revenue minus direct costs, expressed as a percentage. For software businesses this is typically 60–85%; for marketplaces or product businesses it can be 20–50%.
Monthly churn rate — the percentage of customers who cancel or lapse each month.

The simple LTV formula is:

LTV = ARPU × Gross Margin (%) / Monthly Churn Rate (%)

The calculator first converts your margin and churn percentages to decimals, computes gross profit per user per month (ARPU × margin), then divides by churn to get the expected lifetime value.

If you enter an annual discount rate, the tool switches to the NPV version:

LTV (NPV) = Gross Profit / (monthly discount rate + monthly churn rate)

where the monthly discount rate is derived as (1 + annual rate)^(1/12) − 1. This accounts for the time value of money — a dollar earned three years from now is worth less than one earned today — and is the standard used by SaaS investors.

The average customer lifetime in months is simply 1 / monthly churn. At 5% monthly churn, the average customer stays 20 months; at 2% they stay 50 months.

CAC, LTV:CAC and payback

Enter your Customer Acquisition Cost directly (e.g. from your CRM), or let the calculator derive it by dividing total acquisition spend by the number of new customers acquired in the same period. This is the standard CAC = Total Marketing Spend / New Customers formula used across growth finance.

With CAC known, the tool computes two additional metrics:

LTV:CAC ratio — the number of dollars of lifetime value earned per dollar of acquisition spend. The 3:1 benchmark is ubiquitous in venture and growth contexts: below it you are likely burning cash on growth; at or above it you have room to scale.
CAC payback period — how many months of gross profit from a customer are needed to recover the acquisition cost. This is a cash-flow metric: even with a healthy long-run LTV:CAC, a 24-month payback is a working-capital strain for a bootstrapped business.

Worked example

A SaaS product charges $49/month (ARPU), has a 70% gross margin and loses 3% of subscribers each month. With no discount rate:

Gross profit per user/month = $49 × 0.70 = $34.30
Average lifetime = 1 / 0.03 = 33.3 months
LTV = $34.30 / 0.03 = $1,143

If the team spends $15,000 on ads and acquires 100 new customers:

CAC = $15,000 / 100 = $150
LTV:CAC = $1,143 / $150 = 7.6 : 1 — healthy
Payback = $150 / $34.30 = 4.4 months

Applying a 10% annual discount rate gives a monthly discount of about 0.797%, so:

LTV (NPV) = $34.30 / (0.00797 + 0.03) = $906

The NPV LTV is lower, but the LTV:CAC of 6:1 remains comfortably above the 3:1 threshold.

Why LTV matters

LTV determines how much you can rationally spend to acquire a customer. Once you know your LTV, you can set a maximum CPA (cost per acquisition), plan marketing budgets with confidence, and evaluate which channels generate customers worth keeping versus customers who churn immediately. Pairing LTV with cohort retention data — watching how LTV changes across different acquisition channels or product tiers — is one of the most powerful levers in growth strategy.