How to calculate customer lifetime value (LTV)
Customer lifetime value (LTV, sometimes CLV) estimates how much gross profit a customer generates before they churn. It is the counterweight to CAC: acquisition only makes sense if lifetime value comfortably exceeds it.
There are several formulas of increasing sophistication. Start with the margin-adjusted churn formula, then refine it with expansion revenue once your base is stable.
- ARPA x GM / churn The core formula
- Gross margin Use profit, not revenue
- LTV to CAC 3:1 The healthy ratio
Short answer
Customer lifetime value is the total gross profit you expect from a customer over their entire relationship. A common formula is average revenue per account times gross margin percentage, divided by the churn rate. If a customer pays 1,200 dollars a year at 80 percent margin and 20 percent churn, LTV is 4,800 dollars.
Step by step
Find average revenue per account
Divide total recurring revenue by the number of accounts to get ARPA per period (monthly or annual). Keep the period consistent with your churn rate.
Multiply by gross margin
LTV should be built on profit, so multiply ARPA by your gross margin percentage. This converts revenue into the actual value a customer contributes.
Divide by the churn rate
Dividing margin-adjusted revenue by the churn rate estimates the average customer lifetime value. A lower churn rate produces a longer life and a higher LTV.
Refine with expansion
For accounts that grow over time, use net revenue retention in place of gross churn so expansion lifts LTV. This is more accurate for products with strong upsell.
Worked example
A customer pays 2,000 dollars per year. Gross margin is 80 percent, so annual gross profit is 1,600 dollars. Annual customer churn is 20 percent, implying an average customer life of 5 years (1 divided by 0.20).
LTV = 1,600 x 5 = 8,000 dollars, or equivalently 1,600 / 0.20 = 8,000 dollars. If CAC is 2,000 dollars, your LTV to CAC ratio is a healthy 4 to 1.
How Ardovo handles it
Ardovo computes LTV from live revenue, margin, and actual churn by cohort, so it reflects reality instead of an optimistic assumption. Rook shows how expansion and churn are moving LTV and flags cohorts where lifetime value is eroding.
Frequently asked questions
What is the LTV formula?
A common version is average revenue per account times gross margin percentage, divided by the customer churn rate. For products with expansion, substitute net revenue retention for churn to capture growth within accounts.
Should LTV use revenue or gross margin?
Gross margin. Revenue-based LTV overstates value because it ignores the cost to serve. Always build LTV on the gross profit a customer generates for a decision-grade number.
What is a good LTV to CAC ratio?
About 3 to 1. Below that, acquisition is too expensive relative to value. Well above 5 to 1 can mean you are underinvesting in growth and could acquire more aggressively.
How does churn affect LTV?
Churn is the denominator, so it drives lifetime directly. Halving churn roughly doubles average customer life and therefore LTV. Retention improvements are often the highest-leverage way to raise LTV.