How to calculate LTV
The common subscription formula has three inputs. Start with ARPU, the average monthly recurring revenue per paying customer. Multiply it by your gross margin, so the figure counts what you keep after the cost of serving the customer, not the whole price. Then divide by your monthly customer churn rate. Dividing by churn is the same as multiplying by the expected lifetime in months: at 2.5% churn a month, the average customer stays 1 ÷ 0.025 = 40 months.
Some businesses leave out the margin and report revenue LTV instead. That is fine as long as the label says so, because revenue LTV is always the larger number and compares badly with a cost figure.
LTV is usually read next to CAC, customer acquisition cost: what you spend on sales and marketing to win one new customer. The LTV:CAC ratio says how many times over a customer pays back what it cost to acquire them.
LTV = ARPU × gross margin ÷ monthly customer churn rate
LTV:CAC = LTV ÷ customer acquisition cost
Worked example
A software company has an ARPU of $60 a month, keeps 80% of it after hosting and support costs, and loses 2.5% of its customers each month. It spends $480 in sales and marketing to win each new customer.
- ARPU per month
- $60
- Gross margin per customer per month: $60 × 80%
- $48
- Expected lifetime: 1 ÷ 2.5% monthly churn
- 40 months
- LTV: $48 × 40
- $1,920
- Customer acquisition cost (CAC)
- $480
- LTV:CAC: $1,920 ÷ $480
- 4 to 1
Leaving out the margin would give a revenue LTV of $60 × 40 = $2,400, which overstates what each customer is worth to the business by $480.
Why LTV matters
LTV puts a ceiling on what you can spend to win a customer. If a customer is worth $1,920 in gross profit, spending $2,000 to acquire one loses money on every sale, however fast the business grows.
It also shows which lever moves the business most. Lower churn, a higher price and a better margin all raise LTV, and the formula makes the trade visible: halving churn from 2.5% to 1.25% doubles LTV, the same as doubling the margin per customer.
Common mistakes
- Using revenue instead of gross profit A customer paying $60 a month who costs $12 a month to serve is worth $48 a month to you. Compare that, not the price, with what you spend to acquire them.
- Trusting a tiny churn rate A young business with 0.5% churn in its first months gets an expected lifetime of 200 months, over sixteen years. Churn that low rarely holds, so cap the lifetime at something you can defend.
- One LTV for every customer Monthly and annual customers, small and large accounts, churn at different rates. An average across all of them hides the segments that pay back and the ones that do not.
- Mixing periods Monthly ARPU must be divided by monthly churn. Dividing monthly ARPU by annual churn gives a number roughly twelve times too small.