LTV calculator: what a customer is worth, in gross profit

This page answers the good half of unit economics: how much a customer gives back. The other half, what it costs to win them, belongs to the fully loaded CAC calculator, which adds up media, people and tools for the whole month. The two meet in the LTV:CAC ratio at the top of this page: if your CAC is still a guess, calculate it there first and come back with the number.

Why the LTV everyone quotes is always optimistic

There are four LTVs for the same customer, and the gap between them is wide enough to flip an investment decision.

The first is revenue LTV: order value times lifetime. It is the largest and the most quoted, and it cannot be compared to CAC, because part of that revenue leaves as cost of goods, infrastructure, payment fees and shipping. The second is the classic gross profit LTV, monthly gross profit divided by churn, which is already an honest base for a decision. The third is the adjusted LTV, which adds expansion revenue from the customers who stay and discounts money over time. The fourth, the most uncomfortable and the most useful when cash is tight, is the LTV you realize in the first 12 months: the value that actually lands in the year you paid the CAC.

The calculator shows all four side by side, with CAC on the same scale, because the distance between the first bar and the last one is exactly the size of the optimism baked into your plan.

How to use it

1. Fill in average order value and purchases per month. On a monthly subscription, use the subscription price and leave 1. In retail, use the order value and the real frequency (a customer who buys every four months has a frequency of 0.25).
2. Enter gross margin: revenue minus the direct cost of what was sold. That percentage is what turns revenue into money available to pay for acquisition.
3. Enter the CAC for the period. Use fully loaded CAC, with people and tools inside, not the CPA from the ads dashboard.
4. Fill in monthly customer churn (what share of the base cancels or disappears each month) and monthly expansion (how much revenue from those who stay grows each month through upgrades and add-on purchases).
5. Adjust the monthly discount rate, or leave it at zero if you prefer LTV without present value. Between 0.8% and 1.2% per month is a common band.

How it works: the formula

The model is a month by month cohort. In month zero the customer leaves the full gross profit. Every month after that, part of the cohort is gone (churn), those who stayed spend a bit more (expansion) and money is worth a bit less (discount). All of it fits into a single factor:

The advantage of using the same geometric progression for everything is that the 12 month LTV, the 24 month LTV and the infinite one come from the same calculation, instead of different models that never agree. When q reaches 1, because expansion matches churn and discount, the sum does not converge: the tool shows the infinity symbol instead of inventing a number, and the 12 or 24 month LTV becomes the only usable reading.

Worked example (reproduces the default result)

The prefilled values describe a small B2B SaaS: $200 monthly price, 1 charge per month, 70% gross margin, $900 CAC, 5% monthly churn, 2% monthly expansion and a 1% monthly discount rate.

• Revenue per customer per month: 200 × 1 = $200.00. Gross profit per month: 200 × 0.7 = $140.00.
• Average lifetime: 1 ÷ 0.05 = 20 months. Retention: 0.95 to the power of 12 = 54.0% at month 12 and 29.2% at month 24.
• Monthly factor: q = 0.95 × 1.02 ÷ 1.01 = 0.959406, so 1 minus q = 0.040594.
• Adjusted LTV: 140 ÷ 0.040594 = $3,448.78. That is the headline number at the top.
• Classic LTV: 140 ÷ 0.05 = $2,800.00. Revenue LTV: 200 ÷ 0.05 = $4,000.00. The gap between those two is only the margin you never receive.
• LTV in the first 12 months: q to the power of 12 = 0.608175, so 140 × (1 minus 0.608175) ÷ 0.040594 = $1,351.32. Over the first 24 months, with q to the power of 24 = 0.369877, it is $2,173.15.
• LTV:CAC ratio: 3,448.78 ÷ 900 = 3.83:1, inside the healthy band. But the first 12 months ratio is 1,351.32 ÷ 900 = 1.50:1: in year one, every dollar of CAC returns one and a half.
• Payback: 900 ÷ 140 = 6.4 months. Profit per customer: 3,448.78 minus 900 = $2,548.78. Maximum CAC to hold 3:1: 3,448.78 ÷ 3 = $1,149.59.

Now change one thing only: churn from 5% to 3% per month. Lifetime goes from 20 to 33.3 months, adjusted LTV jumps to $6,864.08 and the ratio reaches 7.63:1, without selling at a higher price or spending less on acquisition. No other variable on this screen has that leverage. That is why retention is usually the highest return project in a business with a tight LTV.

How to read it and where the number misleads

The first limit is that LTV is a forecast, not history. It projects the future behavior of a cohort from today's churn, and churn moves with product, price and competition. An LTV over 20 months calculated from three months of operation is an educated guess. Recalculate whenever churn moves.

The second is a heterogeneous base. Average LTV hides the difference between the customer who stays five years and the one who cancels in month two. If your business has very different plans or channels, calculate LTV per segment and compare it to the CAC of that same segment: the cheap channel often brings the customer who stays the least.

The third is constant churn. In real life the cancellation rate is high in the first months and falls later, once the remaining customers are the ones who liked it. A constant churn model underestimates the LTV of those past the critical period and overestimates the LTV of the ones who just arrived. For an acquisition decision, the 12 month LTV is the safer number, because it depends less on that assumption.

The fourth is the temptation to use LTV to justify any CAC. A beautiful ratio with long payback burns cash: you pay for acquisition today and collect over years. Before raising the budget because of the ratio, look at payback and at how much money the growth will demand along the way.

From LTV to a decision

• If the ratio is below 3:1, attack churn before price: LTV is inversely proportional to it. Then compare with the other side of the equation in the CAC calculator.
• If the ratio is above 5:1, the CAC ceiling the tool shows is permission to invest more. Check whether media stands on its own with the ROAS calculator before raising the budget.
• If order value is the easiest lever in your case, see what each extra point of conversion is worth with the conversion rate impact calculator.
• If expansion is your path, track revenue per visitor and test upgrade offers with method, not with hunches.

Frequently asked questions

How do you calculate customer lifetime value?

Take the average revenue a customer generates per month, multiply by gross margin to get monthly gross profit, and divide by monthly churn. With $200 of revenue per month, 70% margin and 5% churn, monthly gross profit is $140 and the classic LTV is 140 divided by 0.05, which is $2,800. That formula assumes the customer spends the same every month and that money in month 30 is worth the same as money today. The calculator on this page refines both with revenue expansion and a monthly discount rate.

Should LTV use revenue or gross profit?

Gross profit. Revenue LTV is the number that ends up on slides, and it cannot be used to decide how much to pay for a customer, because part of that revenue leaves as cost of goods, infrastructure, payment fees and shipping. If your revenue LTV is $4,000 and margin is 70%, what is left to fund acquisition, payroll and profit is $2,800. Comparing CAC against revenue LTV makes any business look healthy.

What is the LTV:CAC ratio and what is a good one?

It is gross profit LTV divided by customer acquisition cost. The most cited SaaS reference is 3 to 1: below 1 you lose money on every customer, between 1 and 3 the customer pays for themselves but little is left for the rest of the business, and above 5 usually means underinvestment in acquisition, because you could buy more customers and still profit. It is a market convention, not a law of nature: it is a starting point, and what really decides is your cash position and payback time.

What is the difference between LTV and CAC payback?

LTV answers how much a customer leaves in total; payback answers how many months it takes them to return what they cost. You can have high LTV and bad payback: a customer who stays five years paying a small amount has a beautiful LTV and takes far too long to pay back, which demands cash to grow. That is why both metrics travel together. The common reference is recovering CAC within 12 months of gross profit.

How does revenue expansion enter LTV?

It grows revenue from the customers who stay and pushes LTV up. In the model on this page, every month the active base shrinks by churn while revenue from those who remain grows by the expansion rate. Once expansion offsets churn, LTV grows very fast and, at the limit, does not converge: that is what happens in a business with net negative revenue churn. In that case the calculator shows the infinity symbol, and the decision should use the 12 or 24 month LTV, which stays a finite, verifiable number.

Why discount LTV over time?

Because gross profit arriving three years from now is not worth the same as gross profit arriving this month: there is a cost of capital and there is the risk the forecast never happens. The monthly discount rate reduces the weight of distant months and brings LTV closer to present value. At 1% per month, gross profit in month 24 enters the calculation worth about 79% of face value. If you do not want that adjustment, put zero in the field and read the classic LTV.

Keep going

Raising LTV means retaining more and converting better the people already inside, and that is done with tests. Start with the complete conversion rate optimization guide, see how to test the trial to paid conversion and read about reducing churn with experimentation, the strongest lever on this screen.