Customer Lifetime Value Calculator
Customer lifetime value is the gross profit a customer is expected to generate before they churn. Most LTV calculations are wildly optimistic because they pair a long lifetime with too-thin a margin definition.
The LTV formula
This standard formulation assumes constant ARPU, constant gross margin, and a constant monthly churn rate — none of which hold cleanly in practice. The result is an upper bound on the gross profit a customer relationship will generate, valid as a directional metric for comparing cohorts or modeling unit economics.
Why gross margin matters
Multiplying by gross margin is the difference between LTV (a profit number) and lifetime revenue (a vanity number). For a SaaS business with 80% gross margin, an 80% adjustment moves LTV from $5,000 to $4,000. For a marketplace at 20% take rate, the same arithmetic moves $5,000 to $1,000 — and the unit economics conversation is entirely different.
Discounting
Money received in year five is worth less than money received this month. A discounted LTV applies a per-period discount rate to future gross profit, recognizing both the time value of money and the rising probability of churn. For a 12% annual discount rate and 2% monthly churn, the discount cuts undiscounted LTV by roughly 15-25% depending on retention curve shape.
Worked example
A vertical SaaS product charges $500/month, runs at 78% gross margin, and loses 1.8% of customers per month. Undiscounted LTV: $500 × 0.78 / 0.018 = $21,667. Average customer lifetime: 1 / 0.018 ≈ 55.6 months. With a 10% annual discount rate, LTV drops to roughly $19,000. If their blended CAC is $4,000, the LTV/CAC ratio is around 5×, indicating efficient acquisition.
What LTV doesn't account for
- Churn variance over time. Cohorts often churn heavily early, then stabilize. Using current period churn assumes that early-life behavior persists; using long-run churn assumes new cohorts behave like old ones. Both are approximations.
- Expansion revenue. If customers grow over time, this formula understates LTV. Adjust ARPU upward by net dollar retention or model cash flows year by year.
- Servicing costs. Customer success, support, and infrastructure are often classified below gross margin (especially for self-serve products). Subtract them if they scale with active customers.
- Strategic value. Logos that anchor a category, generate referrals, or unlock partnerships have value not captured by direct gross profit.