What is Customer lifetime value (LTV)? Definition, Formula & Benchmarks

What is customer lifetime value (ltv)?

Customer lifetime value is the total gross profit a startup expects to earn from one customer across their entire relationship. You calculate it from average revenue per account, gross margin, and churn rate. LTV is the numerator in LTV:CAC, the metric that tells investors whether each customer is worth more than they cost to acquire.

Formula

LTV = (ARPA × Gross Margin %) ÷ Churn Rate

ARPAAverage recurring revenue per account, usually monthly or annual
Gross Margin %Share of revenue left after cost of delivering the product
Churn RatePercentage of customers or revenue lost in the same period

Worked example

A customer pays $500/month at 80% gross margin, and monthly churn is 2%. LTV = ($500 × 0.80) ÷ 0.02 = $20,000 in gross profit expected over that customer's lifetime.

Benchmarks by stage

Always calculate LTV on gross profit, not revenue, and pair it with CAC. A viable model needs LTV of roughly 3x CAC or more.

Source: David Skok, For Entrepreneurs (SaaS Metrics 2.0) (2023)

Why it matters for fast-growing companies

LTV sets the ceiling on what you can profitably spend to acquire a customer. Founders who calculate it on revenue instead of gross profit routinely overspend on acquisition and mask thin unit economics.

Frequently asked questions

Should LTV use revenue or gross profit?+

Use gross profit, not revenue. LTV represents money you actually keep, so multiply average revenue by gross margin before dividing by churn. Using raw revenue inflates LTV by whatever your cost of goods is and makes acquisition spend look far safer than it really is.

Why does churn matter so much for LTV?+

Churn is the denominator, so small changes swing LTV hard. Halving monthly churn from 4% to 2% doubles lifetime value. That leverage is why retention improvements often boost unit economics more than acquisition efforts, and why investors probe churn assumptions closely.

Customer lifetime value (LTV)