What this calculator does
Lifetime value estimates what an average subscriber is worth in gross profit before they leave. Churn does most of the work: the expected lifetime is simply one divided by the monthly churn rate, so small changes in churn move the answer enormously.
Halving churn doubles the value. At 6 per cent monthly churn a customer is worth $1,000 and an average lifetime of 16.7 months; at 3 per cent that becomes $2,000 over 33.3 months, and at 1 per cent it reaches $6,000.
The formula
Expected lifetime in months is the reciprocal of the monthly churn rate. Multiplying monthly revenue by gross margin gives monthly gross profit, and multiplying that by the lifetime gives lifetime value.
| Term | Meaning |
|---|---|
| LTV | Lifetime value: total gross profit expected from an average customer. |
| Expected lifetime | One divided by the monthly churn rate, in months. |
| LTV:CAC ratio | Lifetime value against acquisition cost. Three to one is the usual benchmark. |
The inputs explained
| Field | What to enter |
|---|---|
| Average revenue per account, per month ($) | Average revenue per account per month. |
| Gross margin (%) | Gross margin, since revenue does not all become profit. |
| Monthly churn rate (%) | Monthly churn rate as a percentage. This drives the result more than anything else. |
| Customer acquisition cost (optional) ($) | Customer acquisition cost, for the LTV to CAC comparison. Optional. |
When to use it
Setting an acquisition budget
Lifetime value is the ceiling on what it can be worth paying to win a customer.
Valuing a churn improvement
The reciprocal relationship means a small reduction in churn is worth a great deal.
Assessing unit economics
A ratio below three to one suggests the model does not yet work at scale.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much is a reduction in churn worth?
The same customer at three churn rates.
| Monthly churn | Customer lifetime value | LTV : CAC ratio |
|---|---|---|
| 1% | $6,000.00 | 10.00:1 |
| 3% | $2,000.00 | 3.33:1 |
| 6% | $1,000.00 | 1.67:1 |
Questions
Why does churn matter so much?
Because lifetime is its reciprocal, which is a steep relationship. Going from 6 to 3 per cent doubles the lifetime; going from 3 to 1 per cent triples it again. No other lever in the calculation has that kind of leverage.
What LTV to CAC ratio should I aim for?
Three to one is the widely used benchmark for subscription businesses. Below one the model loses money on every customer. Well above five can indicate under-investment in growth rather than exceptional health.
Why use gross margin rather than revenue?
Because hosting, support and delivery costs consume part of every subscription dollar. Using revenue overstates lifetime value by exactly the amount those costs take, which on a 75 per cent margin is a quarter of the figure.
How reliable is the simple formula?
It assumes constant churn and constant revenue per customer, and neither usually holds. Real churn is higher early and lower later, and expansion revenue lifts spend over time. Treat it as an order-of-magnitude figure, not a forecast.
For the cost of winning those customers, see the customer acquisition cost calculator. For measuring churn itself, see the customer churn and retention calculator.