What “LTV” means (and why this calculator uses gross profit)

Customer Lifetime Value (LTV) is an estimate of the total profit contribution one customer generates over the time they stay with you. People often calculate LTV as revenue, but if your goal is to decide how much you can afford to spend to acquire customers (CAC), you want LTV in a way that matches the money you actually keep. That’s why this calculator defaults to gross profit LTV.

Gross profit is revenue minus direct costs tied to delivering the product or service (COGS). For SaaS, that may include hosting, third-party APIs, payment processing, and direct customer support. For Ecommerce, it includes product costs, fulfillment, packaging, and sometimes shipping subsidies. Gross profit is not the full story (you still have overhead like salaries, rent, and R&D), but it’s the most common “apples-to-apples” layer used for LTV/CAC decisions. If your gross margin is 75%, it means you keep about $0.75 of each $1.00 of revenue before overhead.

The classic SaaS shortcut is to convert churn into an expected lifetime. If your monthly churn is 5%, you can interpret that as “each month, about 5 out of 100 customers leave.” A simple approximation of average lifetime in months is:

• Lifetime (months) ≈ 1 / churn, where churn is expressed as a decimal.
• So 5% churn → 0.05 → lifetime ≈ 1 / 0.05 = 20 months.

Then you multiply by the gross profit you earn per month:

• Gross profit per month = ARPU × gross margin
• Simple LTV = (ARPU × margin) × (1 / churn)

This is fast and often “good enough” for directional decisions. But it’s a simplification: churn isn’t always constant, customer cohorts behave differently, expansion revenue may occur, and annual plans change timing. Still, as a quick “should we scale?” signal, this formula is useful.

Ecommerce doesn’t usually have “churn” the same way SaaS does, because customers can go dormant and then return. Instead, a practical shortcut is to estimate the customer’s monthly purchase rate and how long they stay active:

• Revenue per month = AOV × purchases per month
• Gross profit per month = revenue per month × gross margin
• Simple LTV = gross profit per month × lifespan months

The key variable here is lifespan. If you have cohort data, use the average active months from your analytics. If not, pick a reasonable estimate and then stress-test it (for example, 12 vs 24 months). If a small change in lifespan flips your business from “amazing” to “terrible,” that’s a sign you should measure retention more carefully.

Why add a discount rate? In finance, a dollar today is worth more than a dollar in the future because you could invest it, or because future cash is uncertain. When you use a discount rate (like 10% annually), you’re saying: “future profit should be slightly discounted when comparing to a cost today.” The calculator converts your annual rate to a monthly rate and uses a simple present-value annuity formula:

• Monthly rate r = (1 + annualRate)^(1/12) − 1
• Discounted LTV = GP × [1 − (1 + r)^(-n)] / r (where n is months)

If your discount rate is 0%, discounted LTV equals simple LTV. If your rate is higher, discounted LTV will be slightly lower than simple LTV — especially when lifetimes are long.

How to use LTV without tricking yourself

LTV is powerful, but it’s also easy to inflate accidentally. Use these habits to keep it honest:

• Use gross profit, not revenue: if margins are thin, revenue-based LTV can mislead you.
• Prefer cohort retention over guesses: churn varies by channel, pricing, and onboarding quality.
• Separate new vs. mature cohorts: early churn can be high, then retention stabilizes.
• Watch payback time: even if LTV is big, long payback can kill cash flow.
• Track refunds/chargebacks: especially for Ecommerce and info products.
• Include expansion only if it’s real: upsells and upgrades should be based on data, not hope.

This calculator displays five signals:

• Simple LTV: quick estimate based on constant profit per month and a single lifetime.
• Discounted LTV: present value of that profit stream using your discount rate.
• LTV:CAC ratio: “how many CACs do we earn back?” Common heuristics: <1 bad, ~3 good, 5+ maybe under-spending.
• Payback months: how long it takes to earn back CAC from monthly gross profit.
• Growth lever suggestions: which inputs move LTV the most in your current scenario.

• Step 1: Enter realistic inputs (not best-case) and save as “baseline”.
• Step 2: Improve one lever by 10% (margin, churn, frequency, AOV, ARPU) and save again.
• Step 3: Compare which lever boosts LTV the most per unit effort.
• Step 4: Use the best lever to guide experiments (pricing test, retention project, bundle, etc.).

That’s the “viral” part: once you see which lever matters most, your next growth decision often becomes obvious.

Realistic examples you can copy

Suppose you charge $50/month, your gross margin is 80%, and your monthly churn is 5%.

• Gross profit per month = $50 × 0.80 = $40
• Lifetime months ≈ 1 / 0.05 = 20 months
• Simple LTV ≈ $40 × 20 = $800

If your CAC is $200, then LTV:CAC ≈ 800/200 = 4.0. Payback months ≈ 200/40 = 5 months. In many SaaS contexts, that looks healthy and suggests you could consider scaling acquisition if churn holds.

Suppose AOV is $60, customers buy 0.7 times per month, gross margin is 50%, and average lifespan is 18 months.

• Revenue per month = $60 × 0.7 = $42
• Gross profit per month = $42 × 0.50 = $21
• Simple LTV = $21 × 18 = $378

If CAC is $80, LTV:CAC ≈ 378/80 = 4.7. Payback months ≈ 80/21 ≈ 3.8 months. If your business is cash-constrained, you might still prefer even faster payback — but this is a strong signal.

In SaaS, churn has a nonlinear effect. If churn goes from 5% to 10% (doubling), lifetime halves from ~20 months to ~10 months. That means LTV roughly cuts in half. That’s why retention projects often outperform flashy acquisition pushes.

Frequently Asked Questions

• Should LTV include overhead (salaries, rent, R&D)?

  For CAC and marketing decisions, most teams use gross profit LTV because it’s cleaner and comparable. If you want a “fully loaded” LTV, you can approximate it by lowering the margin input to include average overhead, but treat it as a separate planning metric.

• Is “1 / churn” accurate?

  It’s an approximation that assumes churn is constant and memoryless. Real retention curves often have high early churn and then stabilize. For a quick estimate, it’s useful. For forecasting, cohort-based survival curves are better.

• What churn should I use: logo churn or revenue churn?

  Use logo churn for customer count lifetime, and net revenue churn if you want LTV to reflect expansion or contraction. This calculator is customer-focused, so use the churn rate that best matches “customers leaving.”

• What discount rate should I pick?

  If you want simplicity, set it to 0%. If you want a more finance-style view, 8–15% is common for many businesses. Higher rates make long lifetimes worth less today.

• My LTV:CAC is 10+. Is that always good?

  Not always. It can be great — or it can mean you’re under-investing in growth, your CAC tracking is missing costs, or your retention estimate is inflated. Treat it as a prompt to investigate.

• Does this account for upsells or expansion revenue?

  Not explicitly. If you want to include expansion, you can increase ARPU (SaaS) or AOV/frequency (Ecommerce) to reflect it. Ideally, measure expansion by cohort and plug in the observed averages.

• What about refunds, returns, and chargebacks?

  Those reduce effective gross margin. If refunds are significant, lower the margin slider to reflect the net margin after refunds. You can also use related tools like the Refund Impact Calculator to estimate their effect on profitability.

• How do I improve LTV fast?

  The fastest lever depends on your business. Common levers include better onboarding (lower churn), pricing improvements (higher ARPU/AOV), bundling and upsells (higher value per customer), and product quality improvements (retention). Use the “scenario save” feature to compare lever impacts.

Common pitfalls (and how to avoid them)

• Mixing revenue and profit: if you compare revenue LTV to CAC, you’ll over-spend.
• Using churn from a new product: early churn is often higher; measure cohorts by signup month.
• Ignoring payment timing: annual upfront plans improve cash flow even if LTV is similar.
• Not separating channels: paid social customers may churn differently than organic.
• Forgetting refunds/returns: lower the margin input to reflect net profit after refunds.

If you want the “most actionable” view: calculate LTV, then immediately compare it to CAC and payback. That’s where decisions live.