LTV (Lifetime Value)

Quick Definition

The total revenue a business expects to earn from a customer over the entire duration of their relationship.

Lifetime Value (LTV) is the total amount of revenue you can expect from a single customer over the course of their relationship with your business. It's one half of the most important unit economics equation in business: LTV:CAC ratio.

LTV accounts for how long customers stay, how much they pay, and how often they expand their usage. A customer who pays $100/month for 2 years has an LTV of $2,400. But if that same customer upgrades to $150/month after 6 months, their LTV increases significantly.

The gold standard for sustainable SaaS businesses is an LTV:CAC ratio of at least 3:1. This means every dollar spent acquiring a customer generates at least three dollars in return. Ratios below 3:1 suggest you're overspending on acquisition; ratios above 5:1 suggest you might be underinvesting in growth.

LTV increases when you reduce churn, increase pricing, or drive expansion revenue through upsells and cross-sells. Smart founders focus on all three levers simultaneously.

How to Calculate LTV Step by Step

Step 1: Choose your calculation method. There are two approaches — use the simple method if you're early-stage with limited data, and the precise method once you have 12+ months of cohort data.

Simple Method (early stage):

Step 2a: Find your Average Revenue Per Account (ARPA). Export your active subscriptions from Stripe. Sum all MRR and divide by customer count.

• Total MRR: $42,000
• Active customers: 180
• ARPA = $42,000 ÷ 180 = $233/mo

Step 3a: Find your monthly churn rate. Use your logo churn rate from the last 3-6 months.

• Monthly churn: 4%

Step 4a: Apply the simple formula. Average customer lifetime = 1 ÷ churn rate. Then multiply by ARPA.

• Average lifetime = 1 ÷ 0.04 = 25 months
• Simple LTV = $233 × 25 = $5,825

Precise Method (12+ months of data):

Step 2b: Calculate ARPA and Gross Margin. You need gross margin because not all revenue is profit.

• ARPA: $233/mo
• Gross margin: 82%
• Gross profit per customer: $233 × 0.82 = $191/mo

Step 3b: Use the gross margin-adjusted formula.

• LTV = ($233 × 0.82) ÷ 0.04 = $4,777

This is more conservative — and more accurate — because it only counts the margin you actually keep.

Step 4b: Validate with cohort data. Look at customers acquired 12-24 months ago. How much total revenue have they generated? If your formula says LTV is $4,777 but your 18-month-old cohort has only generated $2,800 per customer on average, your churn rate may be higher than you think or your expansion assumptions are off.

Step 5: Calculate LTV:CAC. Divide LTV by your CAC. Aim for 3:1 or higher.

• LTV: $4,777
• CAC: $1,500
• LTV:CAC = 3.2:1 ✓

Common mistakes founders make:

• Using revenue instead of gross profit (overstates LTV by 15-30%)
• Assuming churn is constant (early cohorts often churn faster than mature ones)
• Not segmenting LTV by plan or customer type (your enterprise LTV and SMB LTV can differ 10x)
• Projecting LTV from less than 6 months of data (too early to know true churn patterns)
• Ignoring expansion revenue, which can significantly increase LTV over time

Skip the spreadsheet. Futureproof calculates LTV automatically using your actual cohort data and subscription history — segmented by plan, channel, and customer tier.

Formula

• Simple LTV = (Average Monthly Revenue per Customer) × (Average Customer Lifetime in Months)
• More Accurate LTV = (ARPA × Gross Margin %) ÷ Monthly Churn Rate
• LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost

Example

Your SaaS metrics:

• Average Revenue Per Account (ARPA): $200/month
• Gross Margin: 80%
• Monthly Churn Rate: 5%

LTV = ($200 × 0.80) ÷ 0.05 = $3,200

If your CAC is $800, your LTV:CAC ratio is 4:1 - a healthy ratio indicating efficient growth.