Customer Lifetime Value (LTV) is the most quoted — and most miscalculated — metric in SaaS. Most people use a formula that silently overstates their business by 20–40%. Here is the simple version, the correct version, and why the gap matters.
The Simple Formula (and Its Flaw)
Simple LTV = Average Revenue Per User ÷ Churn Rate
This version counts revenue, not profit. If you pay 25% of that revenue in hosting, support, and payment fees, your "LTV" is inflated by a third. Revenue is not money you keep.
The Correct Formula
LTV = (ARPU × Gross Margin) ÷ Churn Rate
Multiplying by gross margin converts revenue into the profit you actually retain per customer. This is the number you should compare against CAC.
Worked Example
A SaaS with $100 average monthly revenue per user, 75% gross margin, and 2% monthly churn:
- Simple LTV: $100 ÷ 0.02 = $5,000 (inflated)
- Correct LTV: ($100 × 0.75) ÷ 0.02 = $3,750
That $1,250 gap is the difference between a 3:1 LTV:CAC ratio and a 4:1 ratio on paper. One of them is real, the other is a fantasy that will misprice your growth spending.
3 Common LTV Mistakes
- Using revenue instead of margin. Covered above — it overstates value.
- Using blended churn. If new customers churn faster than old ones, blended churn hides the problem. Segment by cohort when you can.
- Treating one-time buyers like subscribers. For e-commerce, LTV should use average order value × purchase frequency × lifespan, not a churn formula.
How to Raise LTV
Only three levers exist: raise ARPU (pricing, upsells), raise margin (cost control), or lower churn (retention). Churn is usually the cheapest lever — a small retention win compounds across the entire customer base.
Calculate LTV the correct way.
Enter ARPU, margin, and churn — get a margin-adjusted LTV you can trust in your ratio math.
Open LTV Calculator →LTV only makes sense next to acquisition cost and retention. Track your MRR and your churn rate to keep the inputs honest.