What is a good LTV:CAC ratio?

The widely cited benchmark is a minimum of 3:1 -- for every $1 spent acquiring a customer, the business should generate $3 in lifetime gross profit. Below 3:1, the acquisition economics may not cover overhead and generate a return. Above 5:1, the business may be underinvesting in acquisition and leaving growth on the table. The right ratio depends on payback period and business stage: early-stage businesses with long payback periods need higher ratios; mature businesses with proven retention can operate at lower ratios.

How is LTV different for subscription vs. transactional businesses?

Subscription businesses calculate LTV from a predictable recurring revenue stream -- it is more precise because churn rate directly defines customer lifespan. Transactional businesses must estimate repurchase probability and frequency from historical purchase data, making LTV less deterministic. Subscription LTV is also more directly actionable: every 1% reduction in churn rate produces a specific, calculable LTV improvement.

Does LTV include the cost of customer support and service?

Standard LTV calculations use gross margin, which excludes customer support costs (SG&A). For businesses where customer support is a significant per-customer variable cost (e.g., complex enterprise software), consider using a 'fully-loaded customer margin' that includes support cost in the cost base rather than gross margin alone. This produces a more conservative and accurate LTV.

How does LTV affect fundraising valuation?

LTV:CAC ratio is a key metric for growth-stage investors, particularly in SaaS and subscription e-commerce. Investors use LTV and payback period to assess capital efficiency: a business that recovers CAC in 6 months and retains customers for 36 months is a more efficient capital deployer than one with an 18-month payback. Presenting cohort-level LTV data (how much revenue has each customer acquisition cohort generated over time) is the most credible way to demonstrate LTV to sophisticated investors.

Small Business & EcommercePopular

Customer Lifetime Value Calculator

Calculate customer lifetime value (CLV) from order value, purchase frequency, and retention to determine sustainable acquisition budgets.

Customer Data

Average Order Value ($)

Purchase Frequency (per year)

Average number of purchases per customer per year

Average Customer Lifespan (years)

Gross Margin (%)

Customer Acquisition Cost ($)

Optional. Used to calculate LTV:CAC ratio.

Annual Discount Rate (%)

Optional. Adjusts future revenue to present value.

Lifetime Value Analysis

Enter customer data and click calculate.

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Introduction

Every customer is worth more than their first purchase -- but how much more? The answer determines how much you can rationally spend to acquire them, how hard to fight to retain them, and whether your business model is financially sound. Customer lifetime value (CLV or LTV) is the total net revenue a customer generates over their entire relationship with your business. A customer who buys once at $60 and never returns has an LTV of $60. A customer who buys $60 per month for 18 months before churning has an LTV of $1,080. Those two customers look identical on the day of the first purchase and have completely different economic value. According to research by Bain & Company and the Harvard Business School, increasing customer retention rates by just 5% can increase profits by 25% to 95%, because high-LTV customers are retained customers. This calculator computes LTV using three methods -- historical, predictive, and subscription-based -- so you can match the approach to your business model.

What This Calculator Does

This customer lifetime value calculator computes LTV using the historical method (average revenue per customer × gross margin × average customer lifespan), the predictive method (using average purchase frequency, average order value, gross margin, and churn rate), and the subscription method (monthly recurring revenue per customer / monthly churn rate × gross margin). Enter your business data to receive LTV in dollars, LTV:CAC ratio, and payback period in months.

The Formula

LTV (Subscription) = (ARPU × Gross Margin %) / Monthly Churn Rate | LTV (Predictive) = (Average Order Value × Purchase Frequency × Gross Margin) / Churn Rate | LTV (Historical) = Average Revenue per Customer × Gross Margin × Average Customer Lifespan

For subscription businesses: ARPU (average revenue per user per month) divided by monthly churn rate gives the expected number of months a customer remains, multiplied by gross margin gives net LTV. A $49 ARPU, 3% monthly churn, 75% gross margin: LTV = ($49 × 0.75) / 0.03 = $1,225. For transactional businesses: purchase frequency (purchases per year) × average order value gives annual revenue per customer. Divide by churn rate (1 / customer lifespan in years) to project over the relationship. Multiply by gross margin for net LTV.

Step-by-Step Example

Identify the business model and select the LTV method

A SaaS company charges $79/month with 4% monthly churn rate and 80% gross margin. Use the subscription formula.

Calculate subscription LTV

Average customer lifespan: 1 / 4% = 25 months. Total revenue per customer: $79 × 25 = $1,975. LTV: $1,975 × 80% gross margin = $1,580.

Calculate LTV:CAC ratio

Cost to acquire one customer (fully-loaded CAC): $340. LTV:CAC: $1,580 / $340 = 4.6x. This exceeds the 3x benchmark -- a healthy ratio.

Calculate payback period

Monthly gross profit per customer: $79 × 80% = $63.20. Payback period: $340 / $63.20 = 5.4 months. The company recovers acquisition investment in approximately 5.5 months and then generates $63.20/month in net margin for the remaining 19.5 months of the average relationship.

Real-World Use Cases

Setting the Maximum Allowable Customer Acquisition Cost

A subscription fitness app calculates LTV at $480 (12-month average subscription at $40/month, 90% gross margin). The company targets a minimum 3x LTV:CAC ratio for sustainable growth. Maximum allowable CAC: $480 / 3 = $160. Every marketing channel, campaign, and offer is evaluated against this $160 CAC ceiling. Channels generating customers above $160 CPA are optimized or paused. Channels delivering sub-$100 CPA are scaled.

Evaluating Whether to Offer a Promotional Discount for Acquisition

An e-commerce brand considers offering 30% off the first order to drive acquisition. Standard first-order gross profit: $28. Discounted first-order gross profit: $4. But LTV data shows the 24-month value of an acquired customer is $340 (including repeat purchases at full margin). Spending $24 in foregone margin on the first purchase to acquire a $340 LTV customer is rational -- a 14x return on the discount investment. Without LTV analysis, the promotion looks unprofitable on day one.

Retention Investment Decision

A SaaS company is evaluating adding a dedicated customer success function at $180,000 annual cost to improve retention. Current monthly churn: 5% (LTV $1,200 per customer). Projected churn with CS team: 3.5% (LTV $1,714 per customer). They acquire 40 new customers per month. Annual LTV improvement per cohort of 40: ($1,714 - $1,200) × 40 = $20,560/month. Over 12 months (averaging across cohort age), the annual LTV benefit exceeds $150,000 -- approaching the cost of the CS team. Plus, improved retention compounds -- prior cohorts also benefit.

Comparison

Monthly Churn Rate	Avg. Customer Lifespan	LTV ($50 ARPU, 70% Margin)	Impact of 1% Churn Reduction
10%	10 months	$350	+$175 LTV (+50%)
7%	14.3 months	$500	+$175 LTV (+35%)
5%	20 months	$700	+$350 LTV (+50%)
3%	33.3 months	$1,167	+$583 LTV (+50%)
2%	50 months	$1,750	+$875 LTV (+50%)
1%	100 months	$3,500	High sensitivity in low-churn range

Common Mistakes to Avoid

Using gross revenue instead of gross profit in the LTV calculation. LTV must be based on gross margin, not revenue. A $100 AOV customer who buys 5 times per year with 25% gross margin has an LTV of $125/year -- not $500. Applying the revenue number without margin adjustment dramatically overstates LTV and leads to unsustainable acquisition spending.
Using average customer data that masks segment variation. Your highest-LTV customers are not average. Enterprise customers, repeat buyers, and subscription customers typically have 3x to 10x the LTV of one-time buyers. Calculating a single blended LTV may lead to underspending on acquisition for high-LTV segments and overspending for low-LTV segments. Segment your LTV by acquisition source, customer type, or product line.
Projecting LTV into an infinite time horizon without discounting. For customers with long lifespans, future revenue should be discounted to present value (especially for high discount rates). LTV calculated without time discounting overvalues distant future revenue. For most small business planning purposes, 24 to 36-month LTV is a practical and conservative projection horizon.

Frequently Asked Questions

Accuracy and Disclaimer

Customer lifetime value calculations are projections based on historical averages and assumptions about future customer behavior. Actual LTV varies by customer segment, competitive environment, product evolution, and market conditions. LTV projections are for planning and benchmarking purposes only and should be updated regularly as actual retention and purchase data accumulates.

Conclusion

LTV is only as accurate as the inputs that drive it -- particularly churn rate, which has a disproportionate effect on LTV in subscription models. A 2% monthly churn rate produces an average customer lifespan of 50 months. A 5% monthly churn cuts the lifespan to 20 months. Model your LTV conservatively, using the last 12 months of actual churn data rather than aspirational retention targets. For the acquisition side of the LTV:CAC ratio, pair this calculator with the Cost Per Acquisition Calculator. For businesses modeling churn reduction as a growth strategy, use the NPS Impact Calculator to quantify the revenue value of retention improvements.

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