The simplest SaaS LTV formula is: ARPA divided by churn rate. If your average revenue per account is $100/month and your monthly churn rate is 5%, your LTV is $2,000. But this basic formula has limitations that matter as your business grows.
The Simple Formula
LTV = ARPA / Monthly Churn Rate
Example: $100 ARPA / 0.05 churn = $2,000 LTV
This works for early-stage companies with relatively flat pricing and consistent churn. Use the LTV Calculator to run this calculation with your own numbers.
The Gross Margin Formula
The simple formula overstates LTV because it ignores the cost of serving each customer. A more accurate version:
LTV = (ARPA x Gross Margin %) / Monthly Churn Rate
Example: ($100 x 80%) / 0.05 = $1,600 LTV
This matters because a customer generating $100/month in revenue but costing $40/month in infrastructure and support is worth far less than one costing $10/month to serve.
The Expansion Revenue Formula
SaaS products with upsells and seat expansion need a formula that accounts for revenue growth:
LTV = ARPA x Gross Margin % / (Churn Rate - Expansion Rate)
Example: ($100 x 80%) / (0.05 - 0.02) = $2,667 LTV
If your expansion rate exceeds your churn rate, you have negative net churn, which means your existing customer base grows in revenue over time even without new signups. Track this with the NRR calculator.
What LTV Tells You
LTV is most useful as a ratio against customer acquisition cost (CAC). The LTV:CAC calculator helps you evaluate this ratio.
| LTV:CAC Ratio | What It Means |
|---|---|
| Below 1:1 | Losing money on every customer. Fix churn or reduce CAC immediately. |
| 1:1 to 3:1 | Break-even to marginally profitable. Tighten both sides. |
| 3:1 to 5:1 | Healthy SaaS business. This is the target range. |
| Above 5:1 | You may be underinvesting in growth. Increase marketing spend. |
Common Mistakes
Using revenue churn instead of customer churn (or vice versa). Revenue churn includes the effect of downgrades. Customer churn counts logos. Pick one and be consistent. For LTV calculations, revenue churn gives you a more accurate dollar figure.
Ignoring cohort differences. Your overall LTV hides massive variance. Enterprise customers at $500/month with 2% churn have an LTV of $25,000. SMB customers at $30/month with 8% churn have an LTV of $375. Segment your LTV by plan tier and acquisition channel. The churn calculator can help you compute cohort-level rates.
Calculating LTV with too little data. You need at least 12 months of churn data for a reliable LTV estimate. With less data, your churn rate is a guess and your LTV is fiction. Use payback period instead of LTV for early-stage decisions.