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Customer Lifetime Value for SaaS or ecommerce, adjusted for gross margin and churn.
Pct of customers leaving each month
Customer Lifetime Value
$800.00
$40.00 × 80.00% ÷ 4.00%
LTV is gross-profit based
This LTV reflects gross profit, not revenue. Compare it against CAC using a 3:1 or higher ratio for healthy unit economics.
LTV has two common formulations depending on business model. Subscription LTV is dominated by churn — small changes in the churn rate move LTV dramatically. Ecommerce LTV is dominated by purchase frequency and customer lifespan.
Same $40 MRR, 80% gross margin. Only churn changes:
| Monthly churn | Avg. lifetime | LTV |
|---|---|---|
| 2% | 50 months | $1,600 |
| 3% | 33 months | $1,067 |
| 5% | 20 months | $640 |
| 7% | 14.3 months | $457 |
| 10% | 10 months | $320 |
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LTV stands for Customer Lifetime Value — the total gross profit you earn from an average customer over the entire time they stay with your business. It's the denominator of the single most important unit-economics ratio (LTV:CAC) and a core input for budgeting growth.
The simplest SaaS formula is: LTV = (ARPU × Gross Margin) ÷ Monthly Churn. For a product with $40 MRR, 80% gross margin, and 4% monthly churn: LTV = ($40 × 0.80) ÷ 0.04 = $800. This method assumes churn is constant — for longer-lived cohorts with decreasing churn, more sophisticated cohort models give higher LTV estimates.
Multiply AOV (average order value) by purchases per year, by years the customer stays active, by gross margin. A customer with $75 AOV, 3 purchases a year, 2.5-year lifespan, and 55% margin has an LTV of $75 × 3 × 2.5 × 0.55 = $309. Track cohort retention curves to refine the 'years active' input.
Always gross profit. Using revenue inflates LTV and hides unit-economics problems — especially in ecommerce where COGS, shipping, and returns can eat 30–60% of revenue. A revenue-based LTV:CAC of 3× might be a profit-based LTV:CAC of 1.2×, which is unprofitable.
Dramatically. Cutting monthly churn from 5% to 3% raises average customer lifetime from 20 months to 33 months — a 67% jump in LTV. Conversely, 5% monthly churn caps LTV at 20× monthly contribution, regardless of how much you charge. Churn reduction is usually the highest-leverage investment a subscription business can make.
There's no absolute answer — LTV only matters relative to CAC. A $300 LTV is great if CAC is $60 (5:1 ratio) but terrible if CAC is $400 (losing money on each customer). Focus on the ratio, not the nominal LTV number.
