Customer LTV
Total revenue per customer.
What does Customer LTV mean?
Customer Lifetime Value (LTV) estimates the total revenue a business can expect from a single customer over the entire duration of their relationship. It helps companies understand how much each customer is worth, guiding decisions on marketing spend, pricing strategy, and customer retention efforts. A higher LTV relative to acquisition cost indicates a more sustainable and profitable business.
How to calculate Customer LTV
LTV is calculated with the formula: LTV = (ARPU × Gross Margin) / Churn Rate. First, multiply the average revenue per user (ARPU) by the gross margin percentage to get monthly gross profit per customer. Then divide by the monthly churn rate to get the lifetime value. For example, if ARPU is $100/month, gross margin is 70%, and monthly churn is 5%, then LTV = ($100 × 0.70) / 0.05 = $1,400. The average customer lifespan is 1 / Churn Rate — in this case 20 months.
FAQ
A commonly cited benchmark is an LTV:CAC ratio of 3:1 or higher. This means the lifetime value of a customer should be at least three times the cost of acquiring them. A ratio below 1:1 means you are spending more to acquire customers than they generate in revenue.
You can improve LTV by increasing average revenue per user (upselling, cross-selling, price increases), improving gross margins (reducing cost of goods sold), or reducing churn rate (better onboarding, customer support, and product improvements). Even small reductions in churn can dramatically increase LTV.
This simplified formula works best for subscription-based businesses with relatively stable monthly revenue and churn rates. For businesses with variable purchase patterns, contract-based models, or seasonal revenue, more advanced cohort-based or predictive LTV models may be more accurate.
This calculator uses monthly churn rate. If you only know your annual churn rate, you can approximate the monthly rate by dividing the annual rate by 12. For example, a 36% annual churn rate is roughly 3% per month. For more precision, use the formula: monthly churn = 1 − (1 − annual churn)^(1/12).
Gross margin accounts for the direct costs of serving a customer. Not all revenue is profit — there are costs like hosting, support, and fulfillment. By factoring in gross margin, LTV reflects the actual profit a customer generates rather than just top-line revenue, giving a more realistic picture of customer value.
Related calculators
- Churn Rate— Customer loss percentage.
- CAC— Cost to acquire one customer.
- Break-Even— Point where revenue equals cost.
- Profit Margin— Profit as percentage of revenue.