Retention & Churn
What Is Customer Lifetime Value (LTV)?
Learn how to calculate LTV for SaaS subscriptions: ARPU, gross margin, churn, segmentation, and why LTV is the most important value metric.
Customer Lifetime Value (LTV), also called CLV (Customer Lifetime Value), estimates the total gross profit a customer generates over their entire relationship with your business. For subscription companies, LTV is the single most important measure of how valuable each customer is and directly determines how much you can afford to spend on acquisition.
How to use the LTV Calculator
- Open the LTV Calculator and set your currency.
- Enter average monthly revenue per user (ARPU).
- Enter gross margin as a percentage (typical SaaS: 70–85%).
- Enter monthly logo churn rate. The calculator applies LTV = (ARPU × margin) ÷ churn and shows benchmarks below the result.
The LTV formula
The standard SaaS LTV formula:
LTV = (ARPU × Gross Margin) ÷ Monthly Churn Rate
Where:
- ARPU (Average Revenue Per User), average monthly revenue per customer
- Gross Margin: percentage of revenue retained after cost of goods sold (COGS)
- Monthly Churn Rate: percentage of customers or revenue lost per month
Example
| Input | Value |
|---|---|
| ARPU | $100/month |
| Gross margin | 80% |
| Monthly churn | 3% |
| Monthly gross contribution | $80 |
| LTV | $80 ÷ 0.03 = $2,667 |
Use our LTV Calculator to model your numbers.
Why gross margin matters
LTV should reflect profit, not revenue. A customer paying $100/month with 40% COGS contributes only $60/month toward covering acquisition cost and overhead.
SaaS gross margins are typically 70–85% for mature products. Services-heavy or infrastructure-intensive products may be lower.
Using revenue instead of gross margin overstates LTV and leads to overspending on acquisition.
Churn: the LTV lever
Churn appears in the denominator, which means small changes have outsized effects:
| Monthly churn | LTV (at $80 contribution) |
|---|---|
| 5% | $1,600 |
| 3% | $2,667 |
| 2% | $4,000 |
| 1% | $8,000 |
Cutting churn from 5% to 3% increases LTV by 67%, often more impactful than increasing ARPU.
→ Model this with our Churn Impact Calculator
Logo churn vs. revenue churn
Logo churn counts customers lost:
Logo churn = Customers lost ÷ Starting customers
Revenue churn (or MRR churn) measures recurring revenue lost:
Revenue churn = MRR lost ÷ Starting MRR
For LTV calculation, use the churn type that matches your model:
- Logo churn: when customers are roughly equal in value
- Revenue churn: when customer sizes vary significantly (enterprise SaaS)
Net Revenue Retention (NRR) goes further by including expansion:
NRR = (Starting MRR + Expansion − Contraction − Churn) ÷ Starting MRR
NRR above 100% means existing customers grow revenue even without new logos.
LTV calculation methods
1. Simple formula (most common)
LTV = (ARPU × Gross Margin) ÷ Churn
Best for: quick estimates, SMB SaaS with relatively uniform customers.
2. Cohort-based LTV
Track actual revenue from a customer cohort over time and sum gross profit until the cohort reaches zero or stabilizes.
Best for: enterprise with long contracts, high variance in customer value.
3. Discounted cash flow LTV
Sum future gross profit discounted by a rate reflecting time value of money.
Best for: finance teams, investor reporting, long payback periods.
For most growth teams, the simple formula is sufficient for decision-making. Upgrade to cohort-based when ACV exceeds $25K or contract lengths vary widely.
Segmenting LTV
Blended LTV hides critical differences. Segment by:
| Segment | Why |
|---|---|
| Plan tier | Enterprise LTV may be 10× self-serve |
| Acquisition channel | Organic customers often retain better |
| Company size | SMB churn is typically higher than enterprise |
| Cohort month | Product improvements lift newer cohort LTV |
A blended LTV of $3,000 might mask $800 SMB LTV and $15,000 enterprise LTV, leading to wrong CAC targets per segment.
LTV benchmarks
LTV is relative to CAC, not absolute. But directional ranges by segment:
| Segment | Typical LTV range |
|---|---|
| Self-serve SaaS | $500–$3,000 |
| SMB sales-assisted | $3,000–$15,000 |
| Mid-market | $15,000–$100,000 |
| Enterprise | $100,000+ |
The critical benchmark is **LTV:CAC ratio: target 3:1 or higher for sustainable growth.
How to increase LTV
- Reduce churn: onboarding, customer success, product stickiness
- Increase ARPU: pricing, packaging, annual plans with discount
- Drive expansion: upsells, cross-sells, seat-based growth
- Improve gross margin: infrastructure optimization, reduce support costs per user
- Target higher-value segments: move upmarket where LTV is naturally higher
Common LTV mistakes
| Mistake | Impact |
|---|---|
| Using revenue instead of gross margin | Overstates LTV 20–40% |
| Using annual churn in monthly formula | Dramatically wrong LTV |
| Ignoring expansion revenue | Understates LTV for products with upsell |
| One blended LTV for all segments | Misallocates acquisition budget |
| Assuming churn is constant | Early cohorts often churn faster |
LTV in context
LTV connects to every other growth metric:
- **CAC: what you spend to acquire
- **LTV:CAC ratio: unit economics health
- **CAC payback: cash recovery speed
- **Churn: the primary LTV driver
Key takeaways
- LTV = (ARPU × Gross Margin) ÷ Churn, use gross profit, not revenue
- Small churn improvements compound into large LTV gains
- Segment LTV by plan, channel, and customer type
- Pair LTV with CAC and payback for complete unit economics