Customer lifetime value calculator

The LTV formula, unpacked

If 3% of your customers leave each month, the average customer stays about 1 divided by 0.03, or roughly 33 months. Multiply that lifetime by what an average customer pays per month, and you have their lifetime value. Every version of the LTV formula is that idea with more or less refinement bolted on.

ARPA is your recurring revenue divided by your paying customers, so it inherits whatever you decided about MRR. Gross margin converts revenue into the value you actually keep, which matters the moment you compare against what you spent to acquire the customer. Churn is the input that dominates the result, because it sits in the denominator: halve it and lifetime value doubles.

The assumption hiding inside is that today's churn holds for the whole of that projected lifetime. It will not. Treat LTV as a comparison tool, sharp for ranking segments and tracking your own trend, and blunt as an absolute claim about how much a customer is worth.

• Expected lifetime in months = 1 ÷ monthly churn rate
• Revenue LTV = ARPA ÷ monthly churn rate
• Margin LTV = ARPA x gross margin ÷ monthly churn rate
• Use the margin form whenever the number will meet acquisition cost

Revenue LTV and margin LTV, and which one you are looking at

Two conventions travel under the same name. The revenue form, ARPA divided by churn, estimates the revenue a customer produces. The margin form multiplies by gross margin first and estimates the profit. On an 80% margin the two differ by a fifth, so quoting one where the other belongs quietly moves the answer.

This calculator uses the margin form, which is the one you want when comparing against acquisition cost. Set gross margin to 100% and it gives you the revenue form instead.

Kometrics itself reports the revenue form in the app, because it reads your billing data and has no way of knowing your cost of goods. So the LTV on your dashboard will sit above the number this page gives you at any margin under 100%, and that is the two conventions differing, not a disagreement. There is a second, smaller difference: the product divides by the average customer churn of the six preceding months rather than a single rate you type in, which keeps one quiet month from inflating the whole series.

LTV to CAC: the ratio that matters

LTV on its own says nothing about whether growth is working. Paired with customer acquisition cost it says almost everything. The common rule of thumb is that lifetime value should be at least three times what you spent to acquire the customer, using the margin form on the LTV side and a fully loaded figure on the CAC side, sales and marketing included.

Below that, you are buying revenue at a price that leaves little behind. Far above it, the usual reading is not that the business is exceptional but that it is underspending: a ratio of 8 to 1 often means there is profitable acquisition on the table you are not buying.

Payback period is the companion number, and it is the one that constrains cash. Lifetime value spread over 33 months does not help you make payroll in month four, which is why a healthy ratio and a punishing payback period can coexist in the same business.

• LTV to CAC of 3 to 1 or better is the common target
• Use margin LTV and fully loaded CAC, or the ratio flatters itself
• Payback period governs cash; the ratio governs whether the unit works at all
• Compute both by segment, since blended figures describe no real customer