About customer lifetime value
Customer lifetime value estimates the gross profit one customer generates before they cancel. It’s a useful measure of what that relationship is worth, and of whether the profit covers the cost of acquiring the customer.
How it’s calculated
Lifetime value (LTV) is calculated by dividing monthly gross profit by the monthly churn rate. Monthly gross profit is average revenue per account (ARPA) multiplied by the gross margin.
LTV = ARPA × Gross margin ÷ (Monthly churn)
For example, if your ARPA is $200, your gross margin is 85%, and your monthly churn is 5%:
LTV = $200 × 85% ÷ (5%) = $3,400.
One customer would be worth approximately $3,400.
Why it matters
A higher LTV means each customer returns more gross profit, through higher revenue, a stronger margin, or a longer relationship. A lower value means less profit is left to cover the cost of winning the next customer.
LTV is most useful next to customer acquisition cost. A customer can be worth a lot and still be a poor use of cash if winning them costs more than that profit, or if the cost takes a long time to come back. CAC payback shows how fast the acquisition cost is recovered. LTV shows whether the profit over the whole relationship covers that cost.
Assumptions and limitations
This calculator assumes monthly revenue, gross margin, and churn stay constant. It does not account for expansion revenue, contraction, changes in costs, or the time value of money. The result is gross profit over the expected life, not the revenue the customer pays. A churn rate near zero produces a very large value because the model assumes the customer keeps paying at the same margin indefinitely.