The standard LTV formula
LTV equals ACV divided by gross annual churn rate. The formula treats each customer as an annuity: as long as the customer stays, they contribute their annual contract value to cumulative revenue. The churn rate determines how long the average customer stays.``` LTV = ACV / Gross Annual Churn Rate ```
If a customer's annual contract value is $30,000 and the business loses 15% of its ARR annually to churn, LTV is $200,000.
This formula implies that the average customer lifetime is 1 divided by the churn rate. A 10% annual churn rate implies an average customer lifetime of 10 years. These assumptions are strong, and the formula becomes less reliable when churn rates are high or customer cohorts are heterogeneous.
Gross-margin-adjusted LTV
The plain LTV formula counts revenue, not profit. For most decisions about customer acquisition investment, you want the gross-profit variant.
``` Gross-Margin-Adjusted LTV = (ACV / Gross Annual Churn Rate) × Gross Margin % ```
| Input | Example value |
|---|---|
| ACV | $24,000 |
| Gross annual churn rate | 12% |
| Gross margin | 75% |
| Standard LTV | $200,000 |
| Gross-margin-adjusted LTV | $150,000 |
Why LTV alone leads to bad investment decisions
LTV captures magnitude but not timing. A customer worth $500,000 in LTV who takes four years to become profitable represents a very different investment than one who pays back acquisition cost in eight months.
LTV is most useful paired with payback period. Payback period answers a concrete question: how many months of gross profit does it take to recover what was spent to acquire this customer? LTV answers a different one: what is the total expected profit contribution? Together they frame the investment case clearly.
A third ratio, LTV:CAC, is commonly used as a summary efficiency metric. It compares total expected customer value against acquisition cost. See LTV:CAC ratio for how to interpret this ratio and its limitations.
Choosing the right churn rate input
LTV is sensitive to the churn rate input. Using blended gross churn across all customers can hide wide variation between customer segments. Enterprise customers churn at different rates than SMB customers. Computing LTV by segment gives a more accurate picture of where lifetime value is concentrated and where it erodes fastest.
For related concepts, see cac payback period and churn rate.
Frequently Asked Questions
What is the LTV formula for a SaaS business?
The standard SaaS LTV formula is ACV divided by gross churn rate. If a customer pays $20,000 per year and gross annual churn is 10%, the LTV is $200,000. This formula assumes a stable revenue stream and is a simplification of the more precise discounted cash flow approach.
What is gross-margin-adjusted LTV and why does it matter?
Gross-margin-adjusted LTV multiplies the standard LTV by your gross margin percentage. If LTV is $200,000 and gross margin is 70%, gross-margin-adjusted LTV is $140,000. This is the version that should be compared against CAC, because it reflects the actual profit generated by the customer rather than the top-line revenue.
Should LTV be compared to CAC directly?
Only with a payback period check alongside it. A high LTV:CAC ratio looks attractive, but if the payback period is long, the capital tied up in customer acquisition has real cost. LTV:CAC without payback period is incomplete as an investment decision framework.
Put these metrics to work
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