Customer Lifetime Value Calculator
This customer lifetime value calculator puts LTV on margin rather than revenue, discounted rather than nominal, next to the two numbers it is only useful beside: what a customer costs and how long they take to pay you back.
Customer lifetime value
- Lifetime value (discounted, on margin) $64.00 of gross profit a month, decaying 3% a month once the discount rate is included. This is the number to compare with CAC.
- $1,669.57
- Lifetime value (undiscounted) The figure almost everyone quotes. It treats a dollar arriving in year four as worth a dollar today, which overstates LTV the more slowly your customers churn.
- $2,133.33
- Lifetime REVENUE (not value) At a 80% gross margin this is 1.25x the figure above. Quoting it as LTV is the single most common way the number gets inflated.
- $2,666.67
- Average customer lifetime 1 / 3%. That is 2.8 years, and it assumes the churn rate stays flat. See the caveat below, because it usually does not.
- 33.3 months
- Annual churn 3% a month compounds to this, not to 36%. Multiplying monthly churn by twelve overstates it, and the gap widens as churn rises.
- 30.6%
- LTV : CAC Above the 3:1 convention. At $500.00 of acquisition cost you recover 3.34x of it in gross profit.
- 3.34 : 1
- CAC payback period $500.00 recovered at $64.00 of gross profit a month. This is the cash figure: it is what determines how much money the company needs to grow, which LTV:CAC does not say.
- 7.8 months
| Monthly churn | Annual churn | Avg lifetime | LTV |
|---|---|---|---|
| 1% | 11% | 100 mo | $3,490.91 |
| 2% | 22% | 50 mo | $2,258.82 |
| 3% | 31% | 33.3 mo | $1,669.57 |
| 5% | 46% | 20 mo | $1,097.14 |
| 8% | 63% | 12.5 mo | $724.53 |
- LTV is computed on GROSS MARGIN, not revenue. A figure built from revenue is not a lifetime value and cannot be compared with an acquisition cost.
- The 1/churn formula assumes a constant hazard rate. Real churn is front-loaded (the customers who were never a fit leave early and the survivors are stickier), so this understates the value of a cohort that gets past its first few months and overstates the value of one that has not.
How the Customer Lifetime Value Calculator works
Lifetime value is the gross profit you expect from one customer across the whole relationship, discounted back to what it is worth today. It is one division, and almost every way of getting it wrong is a choice made before the division.
The formula is LTV = (monthly revenue per customer x gross margin) / (churn rate + discount rate). At $80 a month, an 80% gross margin and 3% monthly churn, that is $64 of gross profit a month divided by 3%: about $2,133 undiscounted, and about $1,670 once a 10% annual discount rate is applied.
The first and largest error is using REVENUE rather than margin. At an 80% margin the revenue figure is 1.25x the real one; at the 30% margin typical of anything that ships physical goods it is over three times too big. Lifetime value exists to be compared against acquisition cost, and acquisition cost is paid in cash, so the thing it has to be compared with is cash the customer actually leaves behind after you have served them.
The second is multiplying monthly churn by twelve. Churn compounds: 3% a month is 30.6% a year, not 36%, because each month's losses come from a smaller base. The gap grows with the rate: 8% monthly is 63% annual, not 96%.
The third is quoting LTV without CAC. On its own the number says nothing. The convention is that LTV:CAC should be at least 3:1, and the reasoning is that the remaining two thirds have to cover everything gross margin does not: product, engineering, overhead, and the customers you paid to acquire and failed to convert. A 1:1 ratio loses money.
And the fourth is treating LTV:CAC as the whole answer, which hides a cash problem. A business with a 5:1 ratio and an eighteen-month payback period is profitable on paper and consumes cash faster the more it grows, because it pays the acquisition cost today and collects the margin over four years. Payback period is the figure that tells you how much money the company needs; LTV:CAC tells you whether the money is worth spending. They are different questions and both get asked.
Expansion revenue changes the shape rather than the size. Upgrades, seat growth and usage increases offset churn in the denominator, so a cohort shrinking 3% a month in customers but growing 1% a month in revenue decays at 2% and is worth half as much again. When expansion exceeds churn, net revenue retention is above 100%, the denominator goes negative and the formula stops meaning anything. That is correct, because a cohort that grows forever has no finite lifetime value, and at that point the number to manage is retention by cohort rather than a single LTV.
The assumption underneath all of it is a constant churn rate, and it is wrong in a specific and knowable direction. Churn is front-loaded: the customers who were never a fit leave in the first few months, and the ones who remain are systematically stickier than the average. So a single blended rate understates the value of a surviving cohort and overstates the value of a new one. If the decision matters, run it by cohort.
Customer Lifetime Value Calculator FAQ
What is a good LTV to CAC ratio?
3:1 is the usual benchmark. The logic is that gross margin has to cover more than acquisition: product, engineering and overhead all come out of the same two thirds, along with the cost of prospects you paid for and did not convert. Below 1:1 each new customer destroys value. Much above 5:1 is usually a sign of underinvestment in growth rather than an unusually good business.
Should LTV use revenue or gross margin?
Gross margin, always. The number exists to be compared with acquisition cost, which is paid in cash, so it has to be built from the cash a customer leaves behind after the cost of serving them. Using revenue inflates LTV by 1 divided by your gross margin: 25% at an 80% margin, and more than threefold at 30%.
How do I convert monthly churn to annual churn?
Compound it: annual churn = 1 - (1 - monthly) raised to the twelfth. 3% a month is 30.6% a year, not 36%. Multiplying by twelve always overstates it, and the error grows with the rate: at 8% a month the true annual figure is 63%, not 96%.
Why does my LTV come out as unbounded?
Because expansion revenue is at least as large as churn and there is no discount rate, so the series does not converge. That is arithmetically correct and practically useless, because it describes a cohort whose revenue never declines. Add a discount rate, or stop using a single LTV figure and measure retention by cohort instead.
Is CAC payback the same thing as LTV to CAC?
No, and a business can look healthy on one and be in trouble on the other. LTV:CAC asks whether a customer is worth acquiring. Payback asks how long your money is tied up before it comes back, which is what determines how much capital growth consumes. A 5:1 ratio with an eighteen-month payback burns cash faster the faster it grows.