Step-by-Step Guide

How to Calculate Customer Lifetime Value (LTV)

Five steps to calculate LTV accurately. Formulas, worked examples, and practical tips for product managers.

Last updated: March 2026

1
Gather Your ARPU Data

Calculate your Average Revenue Per User (ARPU) by dividing your total monthly revenue by the number of active customers.

›Pull your total monthly recurring revenue from your billing system.
›Count the number of active paying customers at the end of the month.
›Divide total revenue by total customers to get ARPU.
›Example: $50,000 MRR with 500 customers = $100 ARPU.

Formula

ARPU = Total Monthly Revenue / Number of Active Customers

Pro tip: Use revenue-weighted ARPU if you have significantly different customer segments. Segment by plan tier (e.g., Basic vs Enterprise) for more accurate results.

2
Calculate Your Monthly Churn Rate

Figure out what percentage of customers you lose each month. This is the most important variable in LTV.

›Count customers at the start of the month.
›Count how many cancelled or did not renew during the month.
›Divide churned customers by starting customers.
›Example: 500 starting customers, 15 churned = 3% monthly churn.

Formula

Monthly Churn Rate = Customers Lost in Month / Customers at Start of Month

Pro tip: Use at least 3-6 months of data to smooth out seasonal variations. If you only have annual churn, divide by 12 for a rough monthly estimate.

3
Determine Your Gross Margin

Gross margin tells you how much of each revenue dollar is profit after covering the cost of delivering your product or service.

›Calculate your cost of goods sold (COGS): hosting, support, onboarding costs.
›Subtract COGS from revenue to get gross profit.
›Divide gross profit by revenue to get gross margin percentage.
›Example: $100 ARPU - $20 COGS = $80 gross profit = 80% gross margin.

Formula

Gross Margin = (Revenue - COGS) / Revenue x 100%

Pro tip: Typical SaaS gross margins range from 70-85%. Skipping this step overstates LTV by roughly 20-40% for typical SaaS margins. Always use margin-adjusted LTV for business decisions.

4
Apply the LTV Formula

Combine your three inputs into the gross-margin-adjusted LTV formula. This is the standard approach.

›Multiply ARPU by Gross Margin to get margin-adjusted ARPU.
›Divide by monthly churn rate to get LTV.
›This assumes constant churn and ARPU over time.
›Example: ($100 x 80%) / 3% = $2,667 LTV.

Formula

LTV = (ARPU x Gross Margin %) / Monthly Churn Rate

Pro tip: For a quick sanity check, calculate customer lifetime in months (1 / churn rate). With 3% churn, average lifetime is about 33 months. Then LTV = ARPU x Gross Margin x Lifetime.

5
Analyze Results and Take Action

Your LTV number is only useful in context. Compare it against industry benchmarks and your CAC to determine business health.

›Calculate LTV:CAC ratio. Target 3:1 or higher for healthy unit economics.
›Calculate payback period: CAC / (ARPU x Gross Margin). Target under 12 months.
›Compare against 2024 B2B benchmarks: SMB SaaS $5K-$40K, Mid-Market $50K-$200K, Enterprise $300K+.
›Find the biggest lever. Reducing churn by 1% often beats raising ARPU by 10%.

Formula

LTV:CAC Ratio = LTV / CAC (target >= 3:1)

Pro tip: Run sensitivity analysis by adjusting churn rate plus or minus 1-2%. Small churn improvements compound dramatically in LTV. A 1% churn reduction can increase LTV by 30-50%.

Calculate Your LTV Instantly

Skip the manual math. Use our free LTV calculator with built-in benchmarks, LTV:CAC ratio analysis, and payback period calculations.

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Frequently Asked Questions

What is a good customer lifetime value?

A good LTV depends on your business model and market. For B2B SaaS (2024 benchmarks): SMB targets $5,000-$40,000, mid-market $50,000-$200,000, and enterprise $300,000+. More importantly, your LTV:CAC ratio should be at least 3:1 to indicate sustainable unit economics. An LTV:CAC below 1:1 means you are losing money on every customer.

What is the difference between LTV and CLV?

LTV (Lifetime Value) and CLV (Customer Lifetime Value) are the same metric with different abbreviations. Both measure total predicted revenue from a customer over the entire relationship. CLV is more common in retail and consumer contexts; LTV dominates in SaaS and startup writing.

How often should I recalculate LTV?

Recalculate LTV monthly for fast-growing companies and quarterly for more stable businesses. Major events like pricing changes, new product launches, or significant churn rate shifts should trigger an immediate recalculation. Track LTV trends over time rather than focusing on a single snapshot.

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