Formula
How to Calculate LTV (Lifetime Value)
The total revenue a business expects to earn from a customer over the entire duration of the relationship.
Customer Lifetime Value
LTV = ARPA x Gross Margin % x (1 / Churn Rate)
Where
- ARPA
- = Average Revenue Per Account (monthly)
- Gross Margin %
- = Gross margin as a decimal
- Churn Rate
- = Monthly customer churn rate
What Is LTV (Lifetime Value)?
Lifetime Value (LTV or CLV — Customer Lifetime Value) is the total expected revenue from a single customer throughout their relationship with the business. For a SaaS business: LTV = Average Revenue Per User (ARPU) × Gross Margin % / Monthly Churn Rate. Example: $500 MRR per customer × 80% gross margin / 2% monthly churn = $20,000 LTV. The critical ratio is LTV/CAC (Customer Acquisition Cost). A 3:1 ratio is often cited as the minimum for a healthy SaaS business; 5:1 or higher is excellent. Low LTV/CAC (<1:1) means you're spending more to acquire customers than you'll ever earn from them — a business that cannot scale. Improving LTV comes from reducing churn, increasing prices, or expanding per-customer revenue.
Worked Example
A SaaS startup has an average revenue per account (ARPA) of $1,200 annually, gross margins of 80%, and a monthly churn rate of 2% (24% annually). Their LTV would be $1,200 × 80% × (1 ÷ 24%) = $4,000 per customer. If their customer acquisition cost (CAC) is $800, they have a healthy 5:1 LTV:CAC ratio. However, if churn increases to 4% monthly due to competitive pressure, LTV drops to $1,600, making their unit economics unsustainable and requiring immediate attention to retention strategies.
Why LTV (Lifetime Value) Matters
LTV is fundamental to understanding unit economics and business sustainability in venture-backed companies. A strong LTV relative to customer acquisition cost indicates scalable growth, while declining LTV often signals product-market fit issues or competitive threats. Investors use LTV trends to assess whether a company can profitably scale and generate venture-scale returns, making it a key metric in due diligence and ongoing portfolio monitoring.
Related Terms
Frequently Asked Questions
How do you calculate LTV (Lifetime Value)?
LTV (Lifetime Value) is calculated using the formula: LTV = ARPA x Gross Margin % x (1 / Churn Rate). The total revenue a business expects to earn from a customer over the entire duration of the relationship.
What is a good LTV (Lifetime Value)?
What constitutes a "good" LTV (Lifetime Value) depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.