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LTV: How to estimate Lifetime Value (and when not to)

A practical LTV guide: quick models vs cohort-based LTV, unit consistency, and pitfalls with churn and gross margin.

Updated 2026-01-05

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SaaS example (ARPA $200; margin 80%; churn 3%)

Definition

LTV (Lifetime Value) is the gross profit you expect to earn from a customer over their lifetime. The best LTV models are cohort-based, but simple formulas are useful for fast planning.

A common quick model

LTV ~= (ARPA * gross margin) / churn rate (with consistent time units).

Make sure your units match

  • Monthly ARPA must use monthly churn; annual churn must use annual ARPA.
  • Gross margin should reflect COGS, not operating expenses.
  • If you use revenue churn (NRR/GRR), label it clearly; don't mix with customer churn.

When the quick model breaks

  • Expansion revenue is significant (upsells/cross-sells).
  • Churn changes over time (early churn vs long-term retention).
  • Different segments have very different retention curves.

What to pair with LTV

  • CAC and payback period for growth planning.
  • NRR/GRR for revenue retention and expansion effects.

FAQ

Is LTV the same as revenue per customer?
Not necessarily. LTV is ideally based on gross profit over time, not just revenue, and depends on retention/churn.
What churn should I use?
Use customer churn for a simple model, but consider revenue churn (NRR/GRR) if expansion and downgrades matter for your business.

More in saas metrics

CAC: How to calculate Customer Acquisition Cost
Learn how to define and calculate CAC, what to include in costs, and how to segment CAC for better decisions.
CAC Payback Period: What it means and how to improve it
Understand CAC payback: calculation, benchmarks, and levers to improve payback through pricing, margin, and retention.
Churn: How to measure churn rate correctly
A guide to churn rate: customer churn vs revenue churn, measurement choices, and how to track churn by cohort.
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