How to Calculate Customer Lifetime Value in SaaS
Customer Lifetime Value (LTV) is the foundational metric for evaluating unit economics in subscription software. LTV measures the total revenue or gross profit a single customer generates across their entire relationship with your product before cancelling.
Without an accurate LTV calculation, software executives risk overspending on customer acquisition or under-investing in high-value enterprise sales channels.
Open SaaS LTV Calculator
The Core Formula for Gross SaaS LTV
At its simplest, gross customer lifetime value equals your Average Revenue Per User (ARPU) divided by your monthly account churn rate:
Let us walk through a practical example:
- Monthly ARPU: $100.00
- Monthly Churn Rate: 2.5% (0.025)
- Average Customer Lifespan: 1 / 0.025 = 40 months
- Gross LTV: $100 / 0.025 = $4,000.00
Why You Must Factor Gross Margin Into LTV
Top-line revenue LTV can be deceptive. A software company with heavy server infrastructure or high customer success overhead cannot treat top-line revenue as spendable cash for customer acquisition.
Margin-adjusted Net LTV accounts for direct operational costs:
If your SaaS gross margin is 80%, the net contribution per account is $4,000 x 0.80 = $3,200.00. This figure represents the absolute ceiling for customer acquisition spending.
Evaluating the LTV to CAC Ratio
To assess long-term viability, compare your Net LTV against your Customer Acquisition Cost (CAC):
- LTV:CAC Below 3:1: Unhealthy unit economics. Acquisition costs consume too much margin.
- LTV:CAC At 3:1 to 5:1: Optimal benchmark for sustainable software growth.
- LTV:CAC Above 5:1: Under-investing in growth channels. You can safely expand sales spending.
You can run instant scenarios with your own metrics using our free SaaS LTV Calculator.
