What Is LTV? Customer Lifetime Value Explained
LTV (Customer Lifetime Value) is the total gross profit a customer generates over their entire relationship with your business before they churn. It is the counterpart to CAC in the most important unit economics equation: LTV:CAC. Understanding LTV tells you how much you can afford to spend to acquire a customer while remaining profitable.
Quick Answer
LTV = (ARPU × Gross Margin) ÷ Monthly Churn Rate
Example: ($99 × 0.80) ÷ 0.04 = $1,980 LTV
Why LTV Matters
LTV tells you the ceiling for your customer acquisition spend. If your LTV is $1,980, you cannot afford to spend more than $1,980 to acquire a customer — and in practice you should spend no more than a third of that ($660) to maintain a healthy 3:1 LTV:CAC ratio. Without knowing LTV, you are flying blind on how much to invest in growth.
LTV is also a compounding metric. A 1% reduction in monthly churn can increase LTV by 20% or more, because the customer lifetime extends exponentially. This is why churn reduction has such outsized impact on business value.
How to Calculate LTV
LTV Formula
LTV = (ARPU × Gross Margin) ÷ Monthly Churn Rate
Example: ARPU = $99, gross margin = 80%, monthly churn = 4%. LTV = ($99 × 0.80) ÷ 0.04 = $79.20 ÷ 0.04 = $1,980.
The customer lifetime in months is simply 1 ÷ churn rate. In this example, 1 ÷ 0.04 = 25 months. LTV = $79.20/month × 25 months = $1,980.
Gross Margin and LTV
LTV should always use gross profit, not revenue. Gross margin accounts for the cost of delivering your service — hosting, support, infrastructure, and third-party APIs. A SaaS company with $100 ARPU and 60% gross margin generates $60 of gross profit per month, not $100. Using revenue instead of gross profit overstates LTV and can lead to over-investing in acquisition.
| ARPU | Gross Margin | Monthly Churn | LTV |
|---|---|---|---|
| $99 | 80% | 4% | $1,980 |
| $99 | 80% | 2% | $3,960 |
| $99 | 60% | 4% | $1,485 |
Notice how halving churn from 4% to 2% doubles LTV, and how a 20-point drop in gross margin reduces LTV by 25%. Both levers matter enormously.
How to Increase LTV
- Reduce churn. Even a 1% reduction in monthly churn can add 20%+ to LTV. This is the highest-leverage lever.
- Increase ARPU. Raise prices, drive expansion revenue, or move upmarket. Higher ARPU directly increases LTV.
- Improve gross margin. Reduce infrastructure costs, negotiate better vendor terms, or improve operational efficiency.
- Offer annual plans. Annual billing reduces churn and improves cash flow, both of which increase effective LTV.
- Build product stickiness. Integrations, data lock-in, and team features increase switching costs and reduce churn.
Common LTV Mistakes
Common Mistake
Using revenue instead of gross profit. LTV = (ARPU × Gross Margin) ÷ Churn, not ARPU ÷ Churn. A $99 ARPU with 80% gross margin gives $79.20 in monthly gross profit, not $99. Using revenue overstates LTV by 25% in this example.
Common Mistake
Not accounting for expansion revenue in LTV. If your customers upgrade over time, their ARPU increases. Using the initial ARPU understates true LTV. Use a blended ARPU that accounts for expansion.
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