Customer Lifetime Value: The Number That Should Be Running Your Business

Every subscription business tracks MRR. Most track churn. Surprisingly few actually know their customer lifetime value.

That's a problem, because LTV is the number that connects everything else. It tells you how much you can afford to spend on acquisition. It tells you whether your pricing is working. It tells you if your retention efforts are paying off. It's the financial summary of your entire subscriber relationship — from the moment they sign up to the moment they leave.

When I was running growth at Codecademy, LTV was the metric that changed how we made decisions. We stopped asking "how do we get more signups?" and started asking "how do we make each subscriber worth more?" That shift — from acquisition thinking to monetization thinking — is what took us from $10M to $50M ARR.

Here's how to calculate yours, what good looks like, and the specific things that actually move the number.

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What Is Customer Lifetime Value?

Customer lifetime value (LTV, CLV, or CLTV — all the same thing) is the total revenue you expect to earn from a subscriber over the entire duration of their relationship with your business.

A subscriber paying $50/month who stays for 20 months has an LTV of $1,000. Simple.

But the real power of LTV isn't the number itself. It's what it reveals about your business model:

• LTV relative to CAC tells you if your growth is sustainable
• LTV trending up or down tells you if your product is getting more or less valuable to customers
• LTV by segment tells you which customers to acquire more of — and which ones aren't worth the acquisition cost

Most operators look at LTV once, note the number, and move on. That's like checking your bank balance once a year. The value is in the trend and the segments, not the snapshot.

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How to Calculate Customer Lifetime Value

There are several ways to calculate LTV, ranging from simple to sophisticated. Start with the one that matches your data.

Formula 1: The Simple Version

LTV = ARPU × Average Customer Lifetime

Where:

• ARPU = Average Revenue Per User per month
• Average Customer Lifetime = 1 ÷ Monthly Churn Rate

Example:

• ARPU: $50/month
• Monthly churn rate: 4%
• Average lifetime: 1 ÷ 0.04 = 25 months
• LTV = $50 × 25 = $1,250

This works fine for a quick estimate. But it has two blind spots: it ignores your cost to serve the customer, and it assumes revenue per customer stays flat over time.

Formula 2: With Gross Margin

LTV = (ARPU × Gross Margin %) ÷ Monthly Churn Rate

This version accounts for the cost of delivering your product. For most SaaS businesses, gross margin is 70-85%. For digital subscriptions with minimal infrastructure costs, it can be 90%+.

Example:

• ARPU: $50/month
• Gross margin: 80%
• Monthly churn rate: 4%
• LTV = ($50 × 0.80) ÷ 0.04 = $1,000

This is the version I'd recommend for most subscription businesses. It gives you a realistic picture of what each subscriber is actually worth in profit, not just revenue.

Formula 3: With Expansion Revenue

LTV = (ARPU × Gross Margin %) ÷ (Monthly Churn Rate − Monthly Expansion Rate)

This is where it gets interesting. If your subscribers tend to spend more over time — upgrading plans, buying add-ons, increasing usage — your effective "churn" is lower than your cancellation rate.

Example:

• ARPU: $50/month
• Gross margin: 80%
• Monthly churn rate: 4%
• Monthly expansion rate: 2% (from upsells and upgrades)
• Effective net churn: 4% − 2% = 2%
• LTV = ($50 × 0.80) ÷ 0.02 = $2,000

Same subscribers. Same starting revenue. But because expansion revenue is factored in, the LTV doubles. This is why I keep saying net revenue retention is the metric that matters most — it directly amplifies your LTV.

Formula 4: Cohort-Based (Most Accurate)

The formulas above are estimates. They assume churn and expansion rates stay constant — which they don't. Early-month churn is usually higher than later-month churn (survivors tend to stick).

For the most accurate LTV, use cohort analysis:

1. Take a cohort of subscribers who started in the same month
2. Track their cumulative revenue over time (6 months, 12 months, 24 months)
3. Plot the revenue curve
4. Extrapolate based on the tail behavior

This is more work, but it captures the reality that Month 1 churn looks nothing like Month 12 churn. If you have the data, this is the gold standard.

Which Formula Should You Use?

Situation	Use This
Quick estimate, limited data	Formula 1 (Simple)
Planning, budgeting, general use	Formula 2 (With Gross Margin)
Businesses with meaningful expansion revenue	Formula 3 (With Expansion)
Mature businesses with 12+ months of cohort data	Formula 4 (Cohort-Based)

Start with Formula 2. Upgrade to Formula 3 or 4 as your data matures.

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LTV Benchmarks

LTV:CAC Ratio

The most common way LTV is benchmarked is as a ratio to customer acquisition cost (CAC).

LTV:CAC Ratio = Customer Lifetime Value ÷ Customer Acquisition Cost

Ratio	What It Means
Below 1:1	You're losing money on every customer. Unsustainable.
1:1 to 2:1	Breaking even or barely profitable. Too tight.
3:1	The standard benchmark. For every $1 spent acquiring, you earn $3.
4:1 to 5:1	Strong unit economics. Efficient growth.
Above 5:1	Excellent — but also a signal you might be underinvesting in growth.

The median LTV:CAC ratio across B2B SaaS is about 3.2:1. But this varies by industry: cybersecurity and fintech often hit 5:1+ due to high retention and large contract values. B2C subscriptions tend to run lower — 2:1 to 3:1 — because of higher churn and lower price points.

The mistake I see most often: Operators calculate LTV:CAC once, see a healthy ratio, and assume everything is fine. But the ratio can mask problems. A 4:1 ratio from a $200 LTV and $50 CAC is a very different business than a 4:1 ratio from a $20,000 LTV and $5,000 CAC. The absolute numbers matter, not just the ratio.

LTV by Business Type

These are rough ranges, but they give you a sense of scale:

Business Type	Typical LTV Range
B2B SaaS — Enterprise	$50,000 - $500,000+
B2B SaaS — Mid-Market	$10,000 - $80,000
B2B SaaS — SMB	$1,000 - $15,000
B2C Digital Subscription	$100 - $600
Consumer App (Freemium)	$20 - $150
Membership / Community	$200 - $2,000

If you're a B2C subscription with an LTV of $300, you can't afford $200 in acquisition costs — even though a 1.5:1 ratio might feel "close enough." You need your acquisition channels to work at $50-$75 CAC, or you need to increase LTV.

CAC Payback Period

Related to LTV:CAC, this measures how long it takes to recoup your acquisition cost:

CAC Payback = CAC ÷ (ARPU × Gross Margin %)

Payback Period	What It Means
Under 6 months	Excellent. Fast return on acquisition spend.
6-12 months	Good. Standard for healthy SaaS.
12-18 months	Acceptable for enterprise with long contracts.
Over 18 months	Risky. You need strong retention to justify this.

Payback period matters because it determines how much cash you need to fund growth. A 6-month payback means you're reinvesting profits from each customer within the same year. An 18-month payback means you're essentially financing your growth for a year and a half before seeing returns.

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The Five Levers That Increase LTV

LTV is the output. To change it, you need to change the inputs. There are exactly five ways to make a subscriber worth more:

1. Increase Price

The most direct lever. A 10% price increase on new subscribers, assuming no change in conversion or churn, increases LTV by 10%. That's it. No product changes, no new features, no engineering resources.

Most subscription businesses undercharge. When I ask operators when they last revisited pricing, the answer is usually "when we launched" or "over a year ago." Meanwhile, the product improved, costs went up, and the value delivered is significantly higher than what the price reflects.

The data backs this up: companies that revisit pricing every six months see nearly double the ARPU gains compared to those that revisit annually.

Where to start: Run a willingness-to-pay survey with your current subscribers. Van Westendorp's method — four questions about price acceptability — works well and takes 5 minutes for respondents to complete. You'll almost certainly discover you're undercharging somewhere.

And when you do raise prices: apply it to new subscribers only. Grandfather existing subscribers at their current rate. This eliminates the "people will get angry" risk and lets you test new pricing with zero impact on current revenue.

2. Reduce Churn

Every month a subscriber stays is another month of revenue. Reducing monthly churn from 5% to 3% increases average customer lifetime from 20 months to 33 months — a 65% increase in LTV without changing anything about price or expansion.

I covered churn fixes in depth in my churn rate guide, but the summary:

Involuntary churn (start here):

• Enable ML-driven payment retries (Stripe Smart Retries)
• Build a 3-4 email dunning sequence
• Send card expiration reminders before failures happen

Voluntary churn:

• Add a cancellation flow with pause and downgrade options
• Survey every cancelling subscriber — one question
• Find and fix your #1 reason for cancellation

3. Increase Expansion Revenue

If subscribers spend more over time — through upgrades, add-ons, or increased usage — your LTV goes up without extending the customer lifetime.

A subscriber who starts at $50/month and upgrades to $100/month after 6 months has a very different LTV than one who stays at $50/month for the same duration.

The expansion levers:

• Tiered plans with a clear upgrade path as needs grow
• Usage-based components that scale with the customer's success
• Add-ons and premium features for power users
• Seat-based pricing that grows as their team grows

The best expansion revenue is invisible — it happens because the customer's usage or needs naturally grow, and your pricing structure captures that growth. If expansion requires a salesperson to make a call, you've missed the design opportunity.

4. Improve Onboarding (Increase Early Retention)

Most churn happens early. If a subscriber doesn't experience meaningful value in their first few sessions, they're likely to cancel within the first 1-3 months.

Improving early retention has an outsized impact on LTV because it extends the lifetime of your most vulnerable subscribers.

At Codecademy, we found that users who completed their first lesson within 24 hours of signing up were dramatically more likely to still be subscribed 6 months later. The product didn't change. The price didn't change. We just made sure people experienced value faster.

Where to focus:

• What's the "aha moment" in your product? How fast do new subscribers reach it?
• Can you shorten the time from signup to first value?
• Are there setup steps that create friction and cause drop-off?

Effective onboarding can reduce early churn by 20% or more. On a 25-month average lifetime, that could add 5+ months.

5. Shift to Annual Plans

Subscribers on annual plans churn at significantly lower rates than monthly subscribers — partly because the commitment is longer, and partly because there are fewer decision points (one renewal per year vs. twelve).

If 30% of your subscribers are on annual plans, moving that to 50% can meaningfully increase your average LTV.

How to do it well:

• Set your annual discount based on your actual monthly retention rate, not an arbitrary percentage. If 95% of monthly subscribers stick around each month, the expected value of a monthly subscriber over 12 months is about 10.5 months. So even a modest annual discount (2 months free, say) makes you more in expected value — and the subscriber feels like they got a deal.
• Offer the annual plan prominently at signup and as an upgrade for existing monthly subscribers.
• Consider a mid-year "switch to annual" campaign for monthly subscribers who've been around for 3+ months (they've already proven they find value).

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Common LTV Mistakes

Mistake 1: Calculating LTV Once and Forgetting About It

LTV changes. Your pricing changes. Your churn changes. Your expansion revenue changes. A number you calculated 12 months ago may be wildly off today.

Recalculate quarterly at minimum. Monthly if you're making changes to pricing, packaging, or retention.

Mistake 2: Using Average LTV for All Decisions

Your LTV isn't one number — it's a distribution. Enterprise customers might have 10x the LTV of self-serve customers. Subscribers who come from organic search might have 2x the LTV of those from paid ads.

Segment your LTV by acquisition channel, plan type, and customer size. This tells you where to invest more — and where you're overspending.

Mistake 3: Ignoring Gross Margin

Revenue LTV and profit LTV are different numbers. If you're spending $30/month to serve each customer (hosting, support, infrastructure), a $50/month subscriber isn't worth $50 × lifetime. They're worth $20 × lifetime.

Always calculate LTV with gross margin. The formulas above include this for a reason.

Mistake 4: Assuming LTV:CAC of 3:1 Is Always Good

A 3:1 ratio where CAC is $10 and LTV is $30 is a low-value business. You need massive volume to generate meaningful revenue.

A 3:1 ratio where CAC is $5,000 and LTV is $15,000 is a very different proposition.

The ratio matters, but so do the absolute numbers and the payback period.

Mistake 5: Optimizing Only for Acquisition

This is the big one. Most subscription businesses spend 80% of their energy optimizing the top of the funnel — more traffic, better ads, higher conversion rates. And 20% on everything that happens after someone subscribes.

That's backwards. A 20% improvement in retention has more LTV impact than a 20% improvement in acquisition — because retention compounds over the entire customer lifetime, while acquisition is a one-time event.

If your LTV:CAC ratio is below 3:1, the instinct is to lower CAC. Sometimes the better move is to raise LTV.

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LTV Calculator

Simple LTV

LTV = ARPU ÷ Monthly Churn Rate

Example: $50 ÷ 0.04 = $1,250

LTV with Gross Margin

LTV = (ARPU × Gross Margin %) ÷ Monthly Churn Rate

Example: ($50 × 0.80) ÷ 0.04 = $1,000

LTV with Expansion

LTV = (ARPU × Gross Margin %) ÷ (Monthly Churn Rate − Monthly Expansion Rate)

Example: ($50 × 0.80) ÷ (0.04 − 0.02) = $2,000

Average Customer Lifetime (months)

Lifetime = 1 ÷ Monthly Churn Rate

Example: 1 ÷ 0.04 = 25 months

Calculate LTV:CAC Ratio

LTV:CAC = LTV ÷ CAC

Example: $1,000 ÷ $300 = 3.3:1

CAC Payback Period (months)

Payback = CAC ÷ (ARPU × Gross Margin %)

Example: $300 ÷ ($50 × 0.80) = 7.5 months

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FAQ

What is a good customer lifetime value?

There's no universal "good" LTV — it depends entirely on your acquisition cost. An LTV of $500 is excellent if your CAC is $100 (5:1 ratio) and terrible if your CAC is $400 (1.25:1 ratio). Focus on the LTV:CAC ratio (target 3:1 or above) and the CAC payback period (target under 12 months).

What's the difference between LTV, CLV, and CLTV?

Nothing. Customer Lifetime Value (CLV or CLTV) and Lifetime Value (LTV) refer to the same metric. Different companies use different abbreviations. LTV is the most common shorthand in SaaS and subscription businesses.

Should I calculate LTV on revenue or profit?

Profit (using gross margin). Revenue LTV overstates the value of each customer because it ignores the cost to serve them. For most SaaS businesses with 70-85% gross margins, the difference isn't dramatic. But for businesses with significant COGS (infrastructure-heavy products, services bundled with subscriptions), using revenue LTV can seriously mislead your acquisition math.

How does LTV change with expansion revenue?

Dramatically. If subscribers spend more over time, your effective churn rate drops — and LTV increases disproportionately. In the examples above, adding a 2% monthly expansion rate to a business with 4% churn doubled LTV from $1,000 to $2,000. This is why building upsell and expansion paths is one of the highest-leverage things you can do for your subscription business.

How do I increase LTV without raising prices?

Reduce churn (extend the lifetime), build expansion paths (increase revenue per customer over time), and improve onboarding (reduce early drop-off). Shifting more subscribers to annual plans also increases LTV by reducing churn decision points. Price increases are the fastest lever, but not the only one.

What LTV:CAC ratio should I target?

3:1 is the standard benchmark. Below 3:1, you're spending too much to acquire relative to what customers are worth. Above 5:1, you're likely underinvesting in growth and could afford to spend more aggressively on acquisition. But always look at the absolute numbers and payback period alongside the ratio — context matters.

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What to Do Next

LTV is the scoreboard for your subscription business. Every improvement you make — to pricing, packaging, retention, onboarding, or expansion — eventually shows up in this number.

If you want a structured way to find where your biggest LTV opportunities are hiding, I built a free self-assessment that covers all eight revenue leak categories — from pricing and conversion to churn and expansion.

Take the Subscription Revenue Leak Audit →

52 checklist items. 10 minutes. Shows you exactly where you're leaving lifetime value on the table.