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.
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
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.