How do you calculate customer lifetime value (LTV)?

The simple LTV formula is: LTV = ARPU divided by monthly churn rate. Example: $200/month ARPU divided by 0.05 monthly churn = $4,000 LTV. For accuracy, use gross-margin-adjusted LTV: (ARPU x gross margin percentage) divided by monthly churn rate. This reflects actual profit, not just revenue.

What is a good LTV to CAC ratio?

3:1 or higher is healthy for SaaS. Under 3:1 signals marginal unit economics. Above 5:1 typically means you are underinvesting in acquisition - you could grow faster by spending more on CAC without hurting unit economics. Below 1:1 means every customer is unprofitable.

How does churn affect LTV?

Churn is the denominator in the LTV formula, so it has an outsized effect. Cutting monthly churn from 5% to 3% increases LTV by 65% at the same ARPU. This is why retention investments have compounding returns - every point of churn reduction meaningfully expands what you can spend on acquisition.

Should LTV include gross margin?

For serious unit economics work, yes. Gross margin adjusts LTV to reflect actual profit rather than revenue. Compare gross-margin LTV to CAC (which is a real cash cost). Using unadjusted LTV overstates unit economics because CAC is a cash outflow while some ARPU goes to cost-of-service.

What is CAC payback period?

CAC payback period is how many months a customer needs to generate enough gross profit to pay back what you spent to acquire them. Formula: CAC divided by (ARPU x gross margin). Under 12 months is best-in-class for most SaaS. Over 24 months signals you need capital to fund acquisition before customers become profitable.

Free Calculator Instant Results

LTV Calculator

Enter ARPU, churn, and margin. Get LTV, LTV:CAC ratio, and CAC payback instantly.

Monthly ARPU (revenue per customer)

Monthly Churn Rate

Gross Margin (typical SaaS: 70-85%)

CAC (optional) for LTV:CAC + payback

Your Results

Simple LTV

$4,000

ARPU ÷ monthly churn

Gross-margin LTV

$3,200

The number to compare against CAC

Avg lifetime

20.0 mo

Annual churn

46.0%

What if you cut churn? Reducing monthly churn from 5% to 3% would increase LTV from $4,000 to $6,667 — a 67% lift with no change in ARPU or CAC.

The formulas behind it

Simple LTV

LTV = ARPU ÷ Monthly Churn

The quick-math version. Overestimates when churn declines with tenure.

Gross-margin LTV

LTV = (ARPU × Margin) ÷ Churn

The number to compare against CAC. Adjusts for cost of serving.

LTV : CAC ratio

Ratio = Gross-margin LTV ÷ CAC

3:1 healthy. Under 3:1 = problem. Above 5:1 = underinvesting in growth.

CAC payback

Months = CAC ÷ (ARPU × Margin)

How fast a customer pays back their acquisition cost. Under 12 = best-in-class.

Go deeper on unit economics

What is LTV?

The definition + why it matters more than any other metric.

How to calculate LTV (3 methods)

Simple, cohort, predictive. When to use each.

LTV:CAC ratio explained

Benchmarks and how to move the ratio.

CAC payback period

Why investors care more about payback than growth.

Churn is the biggest lever on LTV

A 2% drop in monthly churn increases LTV by 65%. Score your retention setup in 60 seconds and find where the churn is coming from.

Take the Health Check

Retention Diagnostic

Knowing the number is not the same as knowing the cause

A calculator tells you how much is leaving. It cannot tell you which part is failed payments, which part is people who never activated, and which of the two is cheaper to fix. I work that out on your actual data and send back three fixes ranked by what each one is worth, within 10 working days.

✓ Voluntary and involuntary churn, split and costed
✓ What the leavers did in their first month
✓ Three fixes, ranked by dollars recovered
✓ Fixed price, written, no call required

See what it covers $2,500, fixed.