The math, shown
Customer lifetime value (LTV) estimates how much gross profit an average customer brings in over their whole time with you.
LTV = (average revenue per account × gross margin) ÷ monthly churn rate
Average revenue per account (ARPA)
Average monthly recurring revenue per customer account.
Gross margin
The share of revenue left after the direct cost of serving the customer, such as hosting and support. LTV counts gross profit, not revenue.
Monthly churn rate
The share of customers who cancel each month. Dividing by it is the same as multiplying by the expected customer lifetime in months, which is 1 ÷ churn.
Worked example
Take an average revenue per account of $120 a month, a gross margin of 80% and monthly churn of 2.5%.
$120 × 0.80 = $96 of gross profit per customer per month. At 2.5% churn the expected lifetime is 1 ÷ 0.025 = 40 months. $96 × 40 = $3,840, or $96 ÷ 0.025.
With a CAC of $500, the LTV:CAC ratio is $3,840 ÷ $500 = 7.7 to 1. It would take $500 ÷ $96 = about 5.2 months of gross profit to earn the CAC back.
How to read your result
Read LTV together with CAC. David Skok writes that the best SaaS businesses have an LTV more than three times their CAC, sometimes seven or eight times, and ChartMogul describes 3:1 as a common convention. The calculator shows your ratio when you enter a CAC.
The other check is payback: how many months of gross profit it takes to earn back CAC. Skok describes many of the best SaaS businesses doing this in five to seven months, and suggests under 12 months as a guideline.
Frequently asked questions
Why divide by churn?
Churn sets how long customers stay. At 2.5% monthly churn the average customer stays about 40 months (1 ÷ 0.025), so lifetime gross profit is the monthly gross profit multiplied by 40.
Why use gross margin and not revenue?
Because it costs money to serve a customer. Using revenue overstates what each customer is worth. This calculator follows Skok’s formula, which multiplies by gross margin.
What does this formula leave out?
It assumes each customer pays the same amount every month and ignores expansion revenue and discounting. Treat the result as an estimate. Skok also publishes a version that allows for expansion revenue.
Sources
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Written by the Webtilly team
Note: This calculator provides an estimate based on the formula shown above. It is not tax, legal, or financial advice.