Unit economics metric
LTV (Customer Lifetime Value)
Customer Lifetime Value (LTV) projects how much revenue or gross profit a customer will generate before they churn. The simplest formula is ARPU / churn rate; the more honest formula multiplies by gross margin to give a true profit-LTV. Both versions are useful; mixing them is the most common indie SaaS miscalculation.
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Formula
LTV (revenue) = ARPU / monthly churn rate. LTV (gross profit) = LTV (revenue) × gross margin %.
Where:
- ARPU = Average Revenue Per User per month. Total MRR divided by customer count.
- monthly churn rate = Percentage of customers who cancel each month. 5% churn = 0.05.
- gross margin % = (Revenue - cost of goods sold) / revenue. For pure-software SaaS, often 70-90%.
Worked example
ARPU is $49/month. Monthly churn rate is 5% (0.05). Gross margin is 85%. LTV (revenue) = $49 / 0.05 = $980. LTV (gross profit) = $980 × 0.85 = $833.
What it tells you
- The revenue-side of unit economics. LTV paired with CAC is the fundamental health check.
- Whether the offer's price + retention combination is sustainable.
- The 'budget' you have for customer acquisition (LTV is the ceiling on healthy CAC).
What it does NOT tell you
- When the revenue arrives. LTV is theoretical; the customer takes 1/churn months to realize it.
- Whether the churn rate is stable. Calculating LTV against a wildly fluctuating churn rate produces unstable LTV.
- Customer quality. LTV averages over the customer base; bad-fit customers drag down LTV from good-fit customers.
Common miscalculations
- Calculating LTV against monthly churn under 1%. For very low churn, the LTV formula produces inflated numbers that do not reflect reality. Use cohort-based LTV at low-churn scale.
- Mixing revenue-LTV and profit-LTV in the same comparison. Always specify which you mean.
- Calculating LTV before 6+ months of cohort data exists. Pre-revenue LTV is an estimate, not a measurement.
- Using churn rate from one month as if it were the long-run rate. Cohort churn shifts over time.
What is a good LTV?
See the directional range on the customer lifetime value (LTV) benchmark page →
Frequently asked
- When should I use revenue-LTV vs gross-profit-LTV?
- Revenue-LTV for pricing decisions and customer-quality comparisons. Gross-profit-LTV for unit-economics health and fundraising conversations. Both are correct; the use case differs.
More unit economics metrics
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