How is LTV calculated?

Method 1 (SaaS): LTV = (ARPU × Gross Margin) / Churn Rate. Method 2 (e-commerce): LTV = Avg Purchase Value × Purchase Frequency × Customer Lifespan.

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Calculate Customer Lifetime Value (LTV) — the total revenue a business can expect from a single customer over their entire relationship. Choose between the ARPU/churn method or the purchase value method.

What is LTV?

Customer Lifetime Value (LTV or CLV) is the total net revenue a business can expect from a single customer over the entire duration of their relationship. It is a critical metric for determining how much you can spend on customer acquisition (CAC) while remaining profitable.

LTV Formulas

Method 1 — ARPU / Churn:

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

This is the standard SaaS/subscription formula. If ARPU is $25/month, gross margin is 70%, and monthly churn is 5%, then LTV = ($25 × 0.70) / 0.05 = $350.

Method 2 — Purchase Value:

LTV = Avg Purchase Value × Purchase Frequency × Customer Lifespan

For e-commerce: if the average order is $50, customers buy 4 times per year, and the average customer lifespan is 3 years, then LTV = $50 × 4 × 3 = $600.

LTV:CAC Ratio

The LTV:CAC ratio compares lifetime value to customer acquisition cost. A healthy ratio is 3:1 or higher — meaning you earn $3+ for every $1 spent acquiring a customer. Below 1:1 means you're losing money on each acquisition.

How to Improve LTV

Increase ARPU through upsells and premium tiers
Reduce churn through better onboarding and support
Improve gross margins through operational efficiency
Increase purchase frequency with loyalty programs
Extend customer lifespan with retention campaigns