There is no absolute number. What matters is the ratio LTV:CAC (≥ 3:1) and CAC payback (< 12–24 months depending on segment).

Should I use logo churn or revenue churn?

For LTV, revenue churn is more accurate because losing a big-account customer costs more than losing a small one. Track both.

What discount rate should I use?

10–15% is common for SaaS. Your weighted average cost of capital is the technically correct answer.

Does LTV include cross-sell and upsell?

If you have meaningful expansion revenue, include it via Net Revenue Retention. A simple ARPU × gross margin / churn formula understates LTV when NRR is above 100%.

How does LTV change for free-trial users?

Use only paid customers in LTV. Free-trial conversion rate is a separate metric that feeds into effective CAC.

Understanding Customer Lifetime Value (LTV): Formulas and Examples

Q: Should I use logo churn or revenue churn?

For LTV, revenue churn is more accurate because losing a big-account customer costs more than losing a small one. Track both.

Q: What discount rate should I use?

10–15% is common for SaaS. Your weighted average cost of capital is the technically correct answer.

Q: Does LTV include cross-sell and upsell?

If you have meaningful expansion revenue, include it via Net Revenue Retention. A simple ARPU × gross margin / churn formula understates LTV when NRR is above 100%.

Q: How does LTV change for free-trial users?

Use only paid customers in LTV. Free-trial conversion rate is a separate metric that feeds into effective CAC.

Introduction

Customer Lifetime Value (LTV, sometimes CLV or CLTV) is the total gross profit you expect a customer to generate from acquisition until they churn. It is the single most important number for sizing acquisition budgets, evaluating product changes, and judging whether a business is sustainable. This guide explains the standard formulas, their limits, and how to compute LTV honestly.

Definition

LTV is the present value of all future gross profit a customer is expected to generate over the duration of their relationship with the business.

Two operating versions in practice:

Simple LTV — undiscounted, useful for quick analysis and benchmarking.
Discounted LTV — applies a discount rate; closer to a true financial valuation.

The Standard SaaS Formula

LTV = (ARPU × Gross Margin %) / Monthly Churn Rate

Variables:

ARPU = average monthly revenue per user = monthly recurring revenue ÷ active customers.
Gross Margin % = (Revenue − COGS) ÷ Revenue. COGS includes hosting, support, payment processing.
Monthly Churn Rate = customers lost in month ÷ customers at start of month.

The formula derives from: average customer lifetime (in months) = 1 ÷ churn rate; gross profit per customer-month = ARPU × gross margin; multiply the two.

Worked Example — SaaS

ARPU = $80/month
Gross margin = 75%
Monthly churn = 2.5% → average lifetime = 1 / 0.025 = 40 months

LTV = ($80 × 0.75) / 0.025
    = $60 / 0.025
    = $2,400

If the same business runs CAC of $700, LTV:CAC = 2,400 / 700 = 3.43 — healthy. Calculate yours in the LTV Calculator and the CAC Calculator.

Discounted LTV

For more rigorous finance work, apply a discount rate d (commonly 10–20% per year, or your weighted average cost of capital):

LTV = Σ [Monthly Gross Profit × (1 − churn)^t / (1 + d)^t]

In practice, for monthly periods, summing the geometric series gives a closed form that adjusts the simple formula downward by ~10–25%, depending on the discount rate.

E-commerce / Transactional Formula

For businesses without recurring subscriptions:

LTV = Average Order Value × Purchase Frequency × Customer Lifespan × Gross Margin

Variable	Definition
Average Order Value	Total revenue ÷ number of orders
Purchase Frequency	Orders per customer per year
Customer Lifespan	Expected years of repeat purchasing
Gross Margin	(Revenue − COGS) ÷ Revenue

Worked Example — E-commerce

AOV = $90
Purchase frequency = 3 orders/year
Customer lifespan = 4 years
Gross margin = 50%

LTV = $90 × 3 × 4 × 0.50 = $540

If CAC is $120, LTV:CAC = 4.5 — healthy. If CAC is $300, LTV:CAC = 1.8 — concerning.

How to Use LTV in Practice

1. Set acquisition budgets. Maximum sustainable CAC ≈ LTV ÷ 3 for venture-style growth. Tighter for bootstrapped.

2. Evaluate retention initiatives. Cutting monthly churn from 3% to 2% boosts LTV by 50% — often a higher ROI than acquisition spend.

3. Segment. LTV by acquisition channel, plan tier, or customer cohort exposes which segments deserve more (or less) acquisition investment.

4. Pricing decisions. A price increase that raises ARPU 10% with only a 1% bump in churn meaningfully expands LTV.

Common Mistakes

Using revenue instead of gross profit. A 30%-margin company and a 70%-margin company can show identical "LTV" while having very different actual economics. Always include gross margin.
Using a churn rate from too-short a cohort. 6 months of data on a 36-month product is noise. State the cohort window and present sensitivity analysis.
Computing LTV on a single average. Segment LTV by plan, channel, and cohort. Averaging hides the truth.
Conflating logo churn and revenue churn. Losing one large customer can have outsize impact even at low logo churn.
Ignoring negative churn. Expansion revenue from existing customers can offset losses, raising effective LTV above the simple formula. Net Revenue Retention > 100% changes the calculation materially.

FAQs

See below.

Conclusion

LTV is gross profit per customer over their lifetime — not revenue, not gross merchandise volume. Compute it with honest churn data, segment by channel and cohort, discount it if you need a true financial figure, and use it to anchor your acquisition spending. The companies that win unit economics are the ones that measure LTV cleanly and act on the segments.

Educational content; references widely used SaaS finance frameworks (OpenView, ICONIQ, KeyBanc) and SBA small-business resources. Not investment advice.