Calculate SaaS customer lifetime value using the formula: (Average Monthly Recurring Revenue per customer × Gross Margin %) ÷ Monthly Churn Rate. Accurate LTV drives acquisition spending decisions and reveals unit economics health.
The LTV Formula Explained
The most practical SaaS customer lifetime value calculation:
LTV = (ARPU × Gross Margin) ÷ Monthly Churn Rate
Where:
- ARPU = Average Revenue Per User (monthly)
- Gross Margin = percentage of revenue after delivery costs
- Monthly Churn Rate = percentage of customers lost monthly (as decimal)
Example: $100 ARPU × 75% margin ÷ 0.03 churn = $2,500 LTV
Advanced LTV Considerations
Refine your calculation by accounting for:
- Expansion revenue: Include upsells and cross-sells from existing customers
- Cohort analysis: Calculate LTV separately by acquisition channel and customer segment
- Payback period: Divide LTV by customer acquisition cost (CAC) to measure efficiency
- Discount rate: Apply 10% discount to future revenue for time value of money
LTV Benchmarks and Targets
Healthy SaaS companies maintain LTV:CAC ratios of 3:1 or higher. If your LTV is $2,500, you can sustainably spend up to $833 acquiring each customer. Monitor LTV quarterly—declining LTV signals increasing churn or decreasing ARPU.
Takeaway
Accurate LTV calculation is foundational to scaling efficiently. Segment LTV by customer type and channel to identify your most valuable acquisition sources. Use LTV to set acquisition budgets and evaluate marketing channel profitability.
