Subscription metrics
Customer lifetime value calculator
Lifetime value is what an average customer is worth before they leave. It falls straight out of your churn rate, which is why churn is the number to fix.
Revenue left after the cost of serving the customer. Leave at 100 for a revenue-only figure.
Lifetime value
$773.34
- Expected lifetime
- 33.3 months
- Lifetime revenue, before margin
- $966.67
LTV = ARPU × gross margin ÷ monthly churn rate
Lifetime is one over churn
If 3% of customers leave each month, the average customer stays about 33 months. That is simply one divided by the churn rate, and it is the whole reason churn matters so much: halving churn doubles lifetime, and doubling lifetime doubles lifetime value.
No marketing change moves LTV as much as a retention change does.
Use gross margin, not revenue
A lifetime value built on revenue tells you what a customer pays. A lifetime value built on gross margin tells you what they are worth, which is the number you can compare against what it cost to acquire them.
Gross margin here means revenue minus the cost of serving that customer: hosting, payment fees, support, any third-party API you pay per seat. Software businesses commonly sit between 70% and 90%. Leave the field at 100% if you want the revenue figure and know that is what you have.
Where this estimate breaks down
It assumes churn is constant, and it is not. Churn is almost always highest in the first weeks and falls as a cohort matures, so a single blended rate understates the lifetime of customers who made it past the early cliff and overstates everybody else.
It also ignores expansion. If customers upgrade over time, their revenue grows while they stay, and a flat ARPU misses that entirely. A business with real expansion should look at net revenue retention instead, where expansion is the point.
For anything consequential, measure lifetime value by cohort against actual revenue collected. This formula is a planning estimate, not an accounting result.
The ratio that matters
LTV on its own means little. Divided by customer acquisition cost it becomes the number people actually use, and a widely repeated rule of thumb is that a healthy business wants LTV to be at least three times CAC.
Treat that ratio as a prompt rather than a target. A ratio far above three often means you are underspending on acquisition rather than running a great business.
Questions
- How do you calculate customer lifetime value?
- Divide average monthly revenue per user by your monthly churn rate, then multiply by gross margin. At $29 ARPU, 3% monthly churn and 80% margin, lifetime value is about $773 over an expected lifetime of 33 months.
- How is expected customer lifetime calculated?
- One divided by the monthly churn rate. A 3% monthly churn rate implies an average lifetime of about 33 months. This is why halving churn doubles lifetime value.
- Should LTV use revenue or gross margin?
- Gross margin, if you intend to compare it against acquisition cost. A revenue-based figure tells you what a customer pays, not what they are worth after hosting, payment fees and support.
- What is a good LTV to CAC ratio?
- Three to one is the commonly repeated rule of thumb. Treat it as a prompt rather than a target: a ratio far above three often means you are underspending on acquisition rather than running an unusually good business.
- Why is my LTV estimate too optimistic?
- Because the formula assumes constant churn, and churn is almost always highest in the first weeks and falls as a cohort matures. A single blended rate flatters customers who have not yet reached the early cliff. Measure by cohort for anything consequential.