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: Calculate ARPU separately for customer segments with different pricing or retention, such as Basic and Enterprise plans. Keep the revenue and customer counts within the same segment.

2
Calculate Your Monthly Churn Rate

Calculate the percentage of starting customers lost during the month. Lower churn raises the LTV estimate when the other inputs stay constant.

›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: Review several months of data for changes and seasonality. To convert annual churn to an equivalent constant monthly rate, use 1 - (1 - annual churn)^(1/12), with churn as a decimal.

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: At the example’s 80% gross margin, revenue LTV is 25% higher than gross-profit LTV. Use your actual margin and label which measure you report.

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. Bessemer uses 3x or more as an acquisition-investment guideline for cloud companies, not proof of sustainability.
›Calculate payback: CAC / (monthly ARPU x gross margin). Compare it with customer retention and available cash.
›Compare segments using the same LTV formula, time units, and gross-margin treatment.
›Compare changes in churn, ARPU, and margin using plausible assumptions. The largest effect depends on your starting values.

Formula

LTV:CAC Ratio = Gross-Profit LTV / CAC

Pro tip: Test plausible churn assumptions. In this example, reducing monthly churn from 3% to 2% raises estimated LTV by 50%, holding ARPU and margin constant.

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.

Open Free LTV Calculator

Frequently Asked Questions

What is a good customer lifetime value?

LTV depends on pricing, margin, and retention. Compare it with CAC and payback rather than a universal dollar target. A gross-profit LTV below CAC means the model estimates acquisition cost will exceed lifetime gross profit.

What is the difference between LTV and CLV?

LTV and CLV are abbreviations for customer lifetime value. They can refer to expected revenue or gross profit over the customer relationship. This guide uses gross-profit LTV, so state that definition when comparing figures.

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.

Sources

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