SaaS & Retention
LTV Calculator
Lifetime value is the ceiling on what you can pay to acquire a customer, and most people calculate it on revenue rather than gross profit, which inflates it enormously. This one uses margin, because that is the money you actually keep.
Result
FormulaLTV = ARPU × gross margin % × (1 ÷ monthly churn rate)
Worked example
At $85 per month, 78 percent gross margin and 4 percent monthly churn, the average customer stays 25 months and contributes $66.30 of gross profit per month, giving a gross profit LTV of about $1,658. The revenue version reads $2,125, and the difference between those two numbers is exactly the amount of acquisition budget people overspend when they use the wrong one.
What to watch for
This simple model assumes a constant churn rate, which almost no business has. Real churn is highest in the first few months and falls sharply afterward, so a cohort-based LTV is more accurate. Use this figure for direction and sanity checks, not for a five-year financial model.
Churn below roughly 2 percent monthly is strong for small business software, and enterprise contracts should sit far lower. Anything above 5 percent monthly means acquisition can never outrun the leak, and I would stop increasing media spend until retention improves.
Cap the lifetime you are willing to underwrite. Betting acquisition spend on 25 months of future payments from a customer who signed up yesterday is a cash flow decision as much as a marketing one.
Frequently asked questions
Should LTV use revenue or gross profit?
Gross profit. Revenue LTV ignores hosting, support and delivery costs, and in a business with a 78 percent margin it overstates the true value by nearly a third. Every acquisition decision should be made against the profit figure.
How do I calculate LTV with expansion revenue?
Use net revenue retention instead of raw churn. If existing accounts expand faster than others cancel, a simple churn-based model understates value significantly, and the net revenue retention calculator handles that case properly.
How far ahead should LTV look?
For planning I usually cap it at 24 or 36 months even when the model implies more. Longer horizons are technically defensible and practically dangerous, because they justify spending today against revenue that has not been earned.
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