LTV (Customer Lifetime Value)

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

When to use this

Estimate lifetime gross profit for a recurring-revenue product, then compare it with acquisition cost. The estimate assumes monthly revenue per account, gross margin, and customer churn stay constant.

When to use another model

Use a purchase-frequency model for one-time or irregular purchases. When retention or revenue changes substantially over a customer's life, examine cohort data and test alternative assumptions.

Inputs

Monthly ARPU or ARPA: Revenue per user or account, using the same customer unit throughout.
Monthly customer churn: Customers lost during the month divided by customers at its start. Do not substitute net revenue churn, which includes expansion.
Gross margin: The share of revenue left after cost of revenue, before acquisition costs and overhead.
CAC (optional): Enables LTV:CAC and payback calculations.

The math

Revenue LTV = monthly ARPA / monthly customer churn as a decimal
Gross-profit LTV = monthly ARPA x gross margin as a decimal / monthly customer churn as a decimal

PM Toolkit uses the gross-profit formula. A cohort-based model is a separate approach: sum the expected gross profit from a starting customer group over time, including an explicit forecast if the cohort is still active. The current LTV calculator does not perform that analysis.

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 $5,333 estimate is gross profit before acquisition costs and overhead. It is not cash available to spend today.

If a separate cohort model returns $4,100, investigate the observation period, forecast horizon, revenue, and retention assumptions. The difference alone does not establish which estimate is better.

How PM Toolkit calculates it

The calculator uses monthly ARPU × gross margin ÷ monthly customer churn. Optional CAC enables LTV:CAC and payback. The what-if panel lets you change assumptions.

Common mistakes

Confusing revenue and gross-profit LTV. At 60% gross margin, revenue LTV is about 67% higher than gross-profit LTV. Label the measure you use.
Dividing by negative net revenue churn. Expansion needs a model that accounts for revenue changes; it does not create a negative customer lifetime.
Ignoring uncertainty. Compare plausible churn and margin assumptions when data is limited.
Mixing customer groups. Review segments with different pricing, retention, and acquisition costs separately.