Understanding Customer Lifetime Value

Why LTV Matters

LTV estimates the total revenue a customer generates during their relationship with your business. It's a foundational metric for:

Determining how much you can spend to acquire a customer (CAC).
Evaluating the profitability of different customer segments.
Informing product development and customer success investments.
Building financial forecasts and valuation models.

Input Definitions & Data Sources

For each input in the calculator:

Input Field	What It Represents	Where to Find It
Average Revenue Per User (ARPU)	Total recurring revenue in a period divided by number of active customers.	Billing system (Stripe, Chargebee), finance P&L.
Monthly Churn Rate	% of customers who cancel their subscription in a given month.	CRM cancellation logs, subscription analytics platform.
Gross Margin	Revenue remaining after direct costs to serve the customer (hosting, support, transaction fees).	Income statement, cost accounting reports.

Typical Ranges: SaaS churn often 1-5% monthly; gross margins 70-90% for software. E-commerce margins vary widely (20-60%).

Step-by-Step Guide

Select the SaaS/Subscription method for recurring revenue businesses.
Enter your ARPU from your billing system for a recent month.
Enter your Monthly Churn Rate. Use a trailing 3-month average for stability.
Apply your Gross Margin to get the profit-contribution LTV.
Review the intermediate values (like average lifetime) for reasonableness.

Realistic Example

Base SaaS Scenario:

ARPU = $50/month
Monthly Churn = 2.5% (i.e., 0.025)
Gross Margin = 80%

Average customer lifetime = 1 / 0.025 = 40 months.

Monthly contribution = $50 * 0.80 = $40.

Gross LTV = $40 * 40 = $1,600.

Common Mistakes Checklist

Using revenue instead of profit contribution (forgetting margin). Mixing monthly and annual churn rates (e.g., 5% monthly vs. 5% annual). Using blended ARPU across very different customer segments. Ignoring expansion revenue (upsells) which can increase LTV.

Interpretation Guide

If your LTV is lower than expected:

Check if churn is unusually high for your industry.
Verify your ARPU calculation includes all recurring charges.
Ensure you're not mixing trial/non-paying users in the customer count.

Before acting on LTV (e.g., increasing CAC budget):

Confirm the calculation with actual cohort analysis over 12+ months.
Consider seasonality and one‑time events affecting churn.
Discuss with finance to align with cash flow and unit economics.

Frequently Asked Questions

How accurate is this LTV calculator?

It provides an estimate based on constant churn and ARPU. Real‑world LTV is affected by seasonality, expansion revenue, and changing churn rates. Use it for directional insight, not precise financial reporting.

Should I use gross or net revenue?

The calculator uses gross revenue (ARPU). Applying a gross margin approximates the profit contribution. For full unit economics, deduct all variable costs, but ensure consistency with your CAC calculation.

Monthly vs. annual churn—which should I use?

The tool expects monthly churn. If you have an annual churn rate, convert it: monthly churn ≈ 1 - (1 - annual_churn)^(1/12). For example, 20% annual churn ≈ 1.84% monthly.

When should I involve a finance specialist?

When using LTV for budgeting, fundraising, or pricing decisions. Finance can help with cohort analysis, discount rates, and aligning with GAAP accounting.

Customer Lifetime Value Calculator

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Customer Lifetime Value LTV Calculator

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