How to calculate LTV
LTV is the total gross profit you expect from a customer over their lifetime. It is half of the core unit-economics equation with CAC. The common mistake is using revenue instead of margin, which overstates the value a customer actually creates.
Short answer
Calculate LTV (customer lifetime value) by multiplying average revenue per account by gross margin, then dividing by your customer churn rate. For example, 12,000 dollars annual revenue at 80 percent margin divided by 20 percent churn equals 48,000 dollars LTV. Use margin, not raw revenue, for a number that reflects real profit.
Step by step
Find average revenue per account
Calculate the average recurring revenue per customer per period (usually annual). This is the top of the LTV calculation.
Apply gross margin
Multiply by gross margin so LTV reflects profit, not revenue. A customer's value is what you keep, not what you bill.
- LTV = (ARPA x gross margin) / churn rate
- Use gross margin, not raw revenue
- Use annual churn with annual revenue
Divide by churn rate
Dividing by the churn rate estimates the average customer lifespan and total value. Lower churn dramatically raises LTV.
Refine with expansion
For accounts that grow over time, incorporate net revenue retention so LTV reflects expansion, not just the starting contract.
Pair with CAC
Compare LTV to CAC. A ratio of 3 to 1 or better generally signals healthy, scalable unit economics.
How Ardovo helps
Ardovo computes ARPA, margin, and churn from live customer data, so LTV updates as retention changes instead of sitting stale in a spreadsheet. Rook pairs it with CAC and payback to show whether acquisition is truly profitable.
Frequently asked questions
Should LTV use revenue or margin?
Margin. LTV should reflect the profit a customer generates, so multiply average revenue by gross margin before dividing by churn. Using raw revenue overstates value and can justify overspending on acquisition that is not actually profitable.
How does churn affect LTV?
Churn is the denominator, so it drives LTV heavily. Cutting churn from 20 percent to 10 percent doubles the estimated lifetime and thus doubles LTV. Retention improvements often move unit economics more than acquisition improvements.
What is a good LTV to CAC ratio?
A common healthy benchmark is 3 to 1 or higher, meaning a customer generates at least three times what it cost to acquire them. Much higher can signal underinvestment in growth; below 1 to 1 means you lose money on every customer.