How to calculate SaaS LTV

LTV (lifetime value) is roughly how much gross profit one customer brings in before they cancel. It tells you how much you can afford to spend to win a customer. Here's the formula with one example worked through.

The example company below is made up so the math is easy to follow.

The example

Customers pay $60 a month on average, gross margin is 80%, and 3% of customers cancel each month.

The formula

LTV = ARPU × gross margin ÷ monthly churn. $60 × 0.8 ÷ 0.03 = $1,600.

ARPU is average revenue per customer per month (MRR ÷ paying customers). Dividing by churn is the same as multiplying by average lifetime, since average lifetime ≈ 1 ÷ monthly churn: 1 ÷ 0.03 is about 33 months.

Why use gross margin

Revenue-based LTV ($60 ÷ 0.03 = $2,000) ignores hosting, payment fees and support. Gross-margin LTV is what you actually keep, so it's the fairer number to compare against what you spend on acquisition.

Churn moves LTV a lot

Halve churn and LTV doubles. At 6% monthly churn the same customer is worth $800, and at 1.5% it's $3,200. That's why cutting churn is often worth more than raising prices.

Very low churn makes the formula give huge numbers. If churn is under about 1%, many founders cap lifetime at 3 to 5 years instead of trusting the formula.

Using LTV

LTV:CAC = LTV ÷ CAC. If winning a customer costs $400, that's $1,600 ÷ $400 = 4 to 1. A common rule of thumb is to aim for 3 to 1 or better. More on this: CAC payback and LTV:CAC.

Common mistakes

• Using revenue instead of gross profit.
• Measuring churn over too short a window. With few customers, one month is noisy, so average a few months.
• Mixing plans. Annual and monthly customers churn differently, so work out LTV for each if you sell both.
• Treating LTV as cash in hand. It arrives over years, so pair it with CAC payback and runway.

Run your own numbers

The free runway and LTV calculator does this math for your inputs. For churn itself, see how to calculate churn, and for every formula in one place, SaaS metrics formulas.

Want the full model?

The Founder Unit Economics Pack ($39) is an Excel and Google Sheets workbook that ties pricing, churn and CAC to LTV, a 12-month MRR projection and runway, with side-by-side scenarios.