Definitions
What is LTV and how do I calculate it?
LTV definition and formula: average monthly revenue per customer times average customer lifespan in months. Worked example and how churn changes the number.
- 3 August 2026
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What is LTV and how do I calculate it?
LTV (customer lifetime value) is the total revenue a business expects from a customer over the whole relationship. The simplest formula is average monthly revenue per customer multiplied by average customer lifespan in months. A customer paying $50 a month who stays 24 months on average has an LTV of $1,200. Lifespan is usually estimated as 1 divided by monthly churn rate.
Last updated 3 August 2026
| Input | Value |
|---|---|
| Average monthly revenue per customer | $50 |
| Monthly churn rate | 4% |
| Average lifespan (1 / churn) | 25 months |
| LTV (revenue × lifespan) | $1,250 |
Do this
The steps, in order.
- Step 1
Get an accurate monthly churn rate first
Divide customers lost in a month by customers at the start of that month. This single number drives most of the LTV calculation, so it's worth getting a few months of stable data before trusting it.
- Step 2
Calculate average lifespan from churn
1 divided by monthly churn rate gives average months a customer stays. At 5% monthly churn, average lifespan is 20 months; at 2%, it's 50 months. Small changes in churn move LTV a lot.
- Step 3
Multiply by average revenue per customer, not your top plan's price
Blend all plan tiers and any expansion or downgrade revenue into one average monthly figure. Using only your headline price overstates LTV for a business with cheaper plans too.
- Step 4
Decide whether to use revenue or gross margin
Revenue-based LTV is simpler; margin-based LTV (revenue minus cost of serving the customer) is more accurate for comparing against CAC. For a high-margin SaaS product the gap is small; for a business with real delivery costs it matters more.
- Step 5
Recalculate quarterly as churn and pricing change
LTV isn't fixed — a pricing change or a retention improvement shifts it immediately. Stale LTV numbers lead to CAC decisions based on data that's no longer true.
Worth knowing
The bits people get wrong.
LTV is an estimate built on an assumption — that future customers will behave like past ones — so it's less reliable for a very new business with only a few months of churn data. Early-stage LTV numbers should be treated as a rough planning figure, not a precise one, and revisited as more data comes in.
Churn rate has an outsized effect on LTV because it sits in the denominator of the lifespan calculation. Cutting monthly churn from 5% to 3% doesn't just improve retention modestly — it takes average lifespan from 20 months to over 33, nearly doubling LTV from that change alone.
LTV is only useful in relation to CAC. On its own, a $1,200 LTV says nothing about whether the business is healthy; compared against a $200 CAC (a 6:1 ratio), it says the acquisition channel is working well.
Questions
Follow-up questions.
Is LTV the same for every customer segment?
Usually not. Enterprise customers often have lower churn and higher revenue per account than small-business customers on the same product, which can produce a noticeably higher LTV for one segment over another. Calculating LTV per segment, not as one company-wide average, usually reveals this.
How early can I calculate a reliable LTV?
Most practitioners want at least 3-6 months of churn data before trusting an LTV figure, and ideally 12 months to smooth out seasonal effects. Before that, LTV estimates should be treated as directional rather than precise.
Should LTV include upsells and expansion revenue?
Yes, if it's a meaningful part of revenue — many subscription businesses earn a large share of lifetime revenue from upgrades and add-ons after the initial sale. Leaving expansion revenue out understates LTV for any business where accounts tend to grow over time.
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