LTV (Customer Lifetime Value)

The total gross profit a customer is expected to generate before they churn.

When to use this

You have a recurring-revenue product with at least 6 months of customer data, and you want to set a ceiling on what you can spend to acquire each customer. LTV is also the input you need when comparing channels, segments, or pricing tiers.

When NOT to use this

One-time-purchase businesses (the formula assumes recurring revenue). Pre-product-market-fit startups where churn swings 5 percentage points month to month. Any business with fewer than 6 months of cohort data -- you'll get a number, but it'll be fiction.

Inputs

ARPA: Average Revenue Per Account, per month. Use actual collected revenue, not booked.
Monthly churn rate: Customers lost this month divided by customers at start of month. Use logo churn for SMB, revenue churn for mid-market and up.
Gross margin: Revenue minus the cost of serving the customer (hosting, support, payment processing). Not net margin. Not contribution margin.
Retention curve (cohort method only): The percentage of a starting cohort still paying in month 1, 2, 3, etc.

The math

Two valid methods. They disagree more than people admit.

ARPU / churn method (steady-state):

LTV = ARPA / churn_rate
LTV (margin-adjusted) = (ARPA x gross_margin) / churn_rate

Cohort method (more accurate for younger businesses):

LTV = sum over months of (ARPA x retention_rate_at_month_N x gross_margin)

The ARPU/churn version assumes your churn rate is stable. It isn't, in year 1 or 2. Cohort sums the actual revenue each cohort throws off, so it handles non-flat retention curves correctly. Use cohort when retention is still curving down sharply. Use ARPU/churn once cohorts have flattened.

A worked example

A B2B SaaS has $200 monthly ARPA, 3% monthly churn, and 80% gross margin.

LTV (ARPU/churn, revenue)     = $200 / 0.03           = $6,667
LTV (ARPU/churn, margin)      = ($200 x 0.80) / 0.03  = $5,333

The margin-adjusted number is the one you should pin on the wall. Revenue LTV is what your CFO uses to feel good. Margin LTV is what survives a cash-flow audit.

If the cohort method on the same business returns $4,100, the gap (>20%) tells you the customer base isn't at steady state yet. Either churn is still settling, or your early cohorts behaved differently from your recent ones.

How pmtoolkit does it differently

We show both methods side by side and flag when they diverge by more than 20%. That gap is a signal, not noise. It means one of: your churn isn't stable, your cohorts are heterogeneous (free trial converts vs paid acquisition), or your retention curve hasn't flattened yet. In all three cases, trust the cohort number and stop quoting the ARPU/churn one in board decks.

We also surface LTV as a distribution, not a single number. The 25th percentile customer is usually a tenth of the 75th percentile customer. Reporting an average hides the customers actually paying for your growth.

Common mistakes

Using revenue instead of gross margin. A 60% gross margin company quoting revenue LTV is overstating real LTV by 67%.
Ignoring expansion revenue. If existing customers grow, expansion shows up as negative net revenue churn. Bake it in or your LTV is a floor, not a midpoint.
Applying SaaS formulas to one-time-purchase businesses. "Churn" of a furniture buyer isn't 5% a month; it's not a meaningful concept. Use purchase-frequency models instead.
Treating LTV as a single number. It's a distribution. Segment by acquisition channel, plan tier, and cohort, or you're optimizing against an illusion.