Lifetime Value: the total value an average customer generates over their whole relationship with your product.
In practice
A common SaaS estimate: average monthly revenue per customer, divided by the monthly churn rate. A 5%/month churn rate mechanically implies an average 20-month lifetime — which shows how directly LTV depends on retention, not just price. Raising your price without working on retention inflates LTV on paper without changing anything in reality if customers still leave just as fast. That's why this stage and Retention are always read together, never in isolation.
The formula
LTV = average monthly revenue per customer × gross margin ÷ monthly churn rate
- Average monthly revenue
Per account (ARPA) in B2B, per user (ARPU) in B2C. Use what a customer actually pays, after discounts.
- Gross margin
The share of that revenue left after the direct cost of serving the customer — hosting, support, payment fees. Skipping it overstates LTV: a 20% margin business and an 80% margin business are not worth the same per customer.
- Monthly churn
The share of customers lost per month. 1 ÷ churn is the expected lifetime in months, so the whole formula reads "monthly margin × months they stay".
This is the simple, constant-churn version. It assumes churn stays flat forever, which it never does — early months lose more customers than later ones. Good enough to make decisions with; not good enough to raise money on without a cohort-based check (see the FAQ).
Worked example
The same SaaS, two churn rates
- Customers pay €50 a month on average; gross margin is 80%, so each month is worth €40.
- With 5% monthly churn, expected lifetime is 1 ÷ 0.05 = 20 months. LTV = 40 × 20 = €800.
- With 2% monthly churn, lifetime becomes 50 months. LTV = 40 × 50 = €2,000.
- Against the €500 CAC from the CAC example: 1.6:1 in the first case, 4:1 in the second. Same product, same price, same acquisition — retention alone decides whether the business works.
Note what the 2% case implies: 50 months is more than four years. Most practitioners cap lifetime at three to five years, because a model that pays you back in year six is a model you cannot verify yet.
Orders of magnitude
- LTV:CAC around 3:1 is the most quoted SaaS rule of thumb. It is a rough guide, not a law: a 3:1 ratio with a 30-month payback can still sink a company that runs out of cash in month 12.
- Lifetimes differ by an order of magnitude between segments: consumer apps often lose most users within weeks, SMB SaaS keeps customers for one to three years, enterprise contracts run five or more. Compare your LTV to your segment, never to "SaaS" in general.
- With less than a year of data, your churn — and therefore your LTV — is a guess. Say so. A "very rough" LTV labelled as such beats a precise-looking number built on three months of cohorts.
How to improve it
- Cut churn first: every point of monthly churn removed lengthens every customer's lifetime at once. It is the lever with the largest effect on LTV, and the only one that also lowers your effective CAC.
- Grow revenue per customer over time — upsell, cross-sell, usage-based tiers — so that a customer's monthly value rises as they stay instead of staying flat.
- Protect gross margin: a support process or an infrastructure cost that scales with customers eats LTV silently. Margin is the term of the formula founders most often forget.
- Segment before you optimise: compute LTV by acquisition channel and by plan. The blended number hides the segment that is actually profitable — and the one that is not.
In the Tour
Do you know your LTV, even roughly?
- Yes, a solid estimate20 pts
- A very rough guess7 pts
- No idea0 pts
"Do you know your LTV, even roughly?" is the second Revenue question. "A solid estimate" scores 20, "a very rough guess" 7, "no idea" 0, averaged with your pricing and expansion answers into the Revenue stage score. Revenue is often the stage founders score lowest on — not because they don't charge, but because they have never connected what they charge to how long people stay.
Questions people ask
LTV or CLV — is there a difference?
No. Customer lifetime value (CLV or CLTV) and lifetime value (LTV) are the same idea with different initials; marketing literature tends to say CLV, SaaS and startup circles say LTV. What matters is whether the number is revenue-based or margin-based — always check which one you're being shown.
How do I estimate LTV with no churn data yet?
Borrow, then replace. Take the churn of comparable products in your segment as a placeholder, label the resulting LTV as an assumption, and set a date to replace it with your own cohorts. What you must not do is skip the number: a plan without an LTV assumption is a plan that hasn't decided how much a customer is allowed to cost.
Why compute LTV with cohorts instead of the formula?
Because churn isn't constant. A cohort view follows the customers who started in a given month and adds up what they actually paid over time; it captures the early cliff (many leave in month one or two) and the long flat tail (those who survive stay for years). The formula averages those two behaviours into one number that describes neither. Use the formula to start, cohorts to decide.