How to Calculate Customer Lifetime Value (LTV): 3 Formulas That Actually Work
Definition: Customer Lifetime Value (LTV) is the total net profit a business expects to earn from a single customer over their entire relationship. The simplest formula is: LTV = ARPU x Gross Margin / Churn Rate. Always use gross margin, not revenue — using revenue inflates LTV by 2-3x. — From The Two Numbers by Lech Kaniuk
Formula 1: The Simple LTV Formula
LTV = Average Purchase Value x Purchase Frequency x Customer Lifespan
Best for: E-commerce, retail, and transactional businesses.
Example: Online Retailer
Average order value: $85
Purchases per year: 3.2
Average customer lifespan: 2.5 years
LTV = $85 x 3.2 x 2.5 = $680
This formula is intuitive and easy to calculate. Its weakness: it does not account for gross margin or discount rates, so it overstates the actual profit per customer. Use it as a starting point, not a final answer.
Formula 2: The SaaS/Subscription LTV Formula
LTV = (Monthly ARPU x Gross Margin) / Monthly Churn Rate
Best for: SaaS, subscription boxes, membership businesses, and any recurring revenue model.
Example: B2B SaaS Company
Monthly ARPU: $200
Gross margin: 75%
Monthly churn rate: 3%
LTV = ($200 x 0.75) / 0.03 = $5,000
This is the most widely used formula in SaaS. The critical detail: use gross margin, not revenue. If you skip the margin step, you get:
Wrong: $200 / 0.03 = $6,667 (inflated by 33%)
Right: ($200 x 0.75) / 0.03 = $5,000
That $1,667 difference changes your LTV:CAC ratio, your payback period, and your growth strategy. Revenue-based LTV has killed more business plans than bad products.
Formula 3: The Cohort-Based LTV Formula
Instead of a formula, track actual revenue from each monthly or quarterly customer cohort over time. This is the most accurate method because it uses real data instead of assumptions.
How it works
Group customers by the month they signed up. Track cumulative gross profit from each group over 3, 6, 12, 18, and 24+ months. The resulting curve shows you actual LTV at each point in the customer lifecycle.
When to use it
When you have at least 6-12 months of retention data. When your churn rate is not constant (it rarely is). When you need to make high-stakes decisions about CAC investment.
The trade-off
It requires more data and effort than formulas 1 and 2. But it catches things those formulas miss: early churn spikes, retention curve flattening, and cohort quality changes over time.
Step-by-Step: Calculate Your LTV (SaaS Formula)
Step 1: Find your Monthly ARPU
Total monthly recurring revenue (MRR) divided by total active customers. Example: $100,000 MRR / 500 customers = $200 ARPU.
Step 2: Determine your gross margin
Revenue minus cost of goods sold (hosting, support, infrastructure) divided by revenue. Example: ($100,000 - $25,000) / $100,000 = 75% gross margin.
Step 3: Calculate your monthly churn rate
Customers lost this month divided by customers at the start of the month. Example: 15 churned / 500 starting = 3% monthly churn.
Step 4: Apply the formula
LTV = (ARPU x Gross Margin) / Churn Rate = ($200 x 0.75) / 0.03 = $5,000.
Step 5: Validate with your LTV:CAC ratio
If your CAC is $1,500, your ratio is 3.3:1 — healthy. If your CAC is $2,500, your ratio is 2:1 — you need to either reduce CAC or improve retention. Use the LTV calculator to model different scenarios.
LTV Benchmarks by Business Model
| Business Model | Typical LTV Range | Key Driver |
|---|---|---|
| B2B SaaS (SMB) | $2,000 - $15,000 | Churn rate and expansion revenue |
| B2B SaaS (Enterprise) | $50,000 - $500,000+ | Contract length and net revenue retention |
| B2C SaaS | $200 - $2,000 | Monthly churn (often 5-10%) |
| E-commerce (DTC) | $100 - $1,000 | Repeat purchase rate and AOV |
| Marketplace | $300 - $5,000 | Take rate and transaction frequency |
| Subscription Box | $150 - $800 | First 90-day retention |
Common LTV Mistakes
Using revenue instead of gross margin
This is the number one mistake. If your gross margin is 70%, revenue-based LTV overstates your actual value by 43%. Every downstream calculation — LTV:CAC ratio, payback period, growth budget — is wrong.
Projecting lifetime from insufficient data
If your oldest cohort is 8 months old, do not project a 5-year LTV. You are extrapolating from a fraction of the curve. Use observed data with conservative projections, and apply a discount factor for uncertainty.
Ignoring segment-level differences
Enterprise customers and SMB customers have vastly different LTVs. Blending them into a single number hides both your best opportunity and your biggest problem. Always segment by customer type, plan tier, or acquisition channel.
Counting predicted expansion revenue as realized
Expansion revenue (upsells, cross-sells) is real — but only after it happens. Including projected expansion in your LTV before you have data to support it creates a false picture of unit economics.
Frequently Asked Questions
Calculate your LTV in 60 seconds
Use our free calculator to find your customer lifetime value with any of the three formulas above.
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Go Deeper
This post covers the basics. "The Two Numbers That Build or Break Every Business" by Lech Kaniuk includes:
- The complete LTV calculation methodology with cohort analysis templates
- How to segment LTV by channel, plan tier, and customer type
- The retention curve analysis most companies skip
- Case studies showing how companies doubled LTV through margin improvement
Written by Lech Kaniuk, author of "The Two Numbers That Build or Break Every Business."