Customer lifetime value (LTV) is the total gross profit you expect from an average customer before they cancel. For a subscription business, the simple formula is average monthly revenue per customer × gross margin ÷ monthly churn rate. A $100-a-month customer at 80% margin and 2.5% monthly churn is worth $3,200 in gross profit.
Key takeaways
- LTV = average monthly revenue per customer × gross margin % ÷ monthly churn rate.
- Use gross profit, not revenue. At an 80% margin, revenue-based LTV overstates value by 25%.
- Churn is the biggest lever: halving churn doubles LTV.
- Cap lifetimes at three to five years. Very low churn makes the formula run off to infinity.
- LTV on its own means little. Compare it with what you spend to win a customer.
When I wrote about WiseTech in The Subscription Playbook, one number stopped me in my tracks.
One percent.
That was the annual churn rate on its CargoWise logistics software, and it had stayed at or below 1% for nine years. As I put it in the book: if WiseTech had 100 clients at the start of the year, ignored sales completely and added nobody new, it would still have 99 at the end.
Now think about what that does to the value of each customer. A client who stays for decades, on a product with a gross margin in the 90s, is worth an enormous amount of money. That's customer lifetime value at work.
Most of us don't run WiseTech. But every subscription business needs to know what one customer is really worth. If you don't know that, how do you know what you can afford to spend to get one?
What is customer lifetime value?
Customer lifetime value (LTV) is the total gross profit an average customer brings in from the day they sign up to the day they leave.
Notice I said gross profit, not revenue. A customer who pays you $100 a month but costs you $60 a month to serve isn't worth $100 a month. They're worth $40.
In the land and expand chapter of the book, I listed LTV as one of the user metrics every subscription business should watch, alongside renewal rate and customer acquisition cost. I also said something that still holds: you hopefully won't be able to measure true LTV for a few years, because the whole point of a subscription is that people keep paying. Until then, you estimate it.
How do you calculate LTV for a subscription business?
Here's the standard formula:
LTV = (Average monthly revenue per customer × Gross margin %) ÷ Monthly churn rate
It works because 1 ÷ churn gives you the average customer lifetime. If 2.5% of customers leave each month, the average customer stays 1 ÷ 0.025 = 40 months.
So you can also write it like this:
LTV = Monthly gross profit per customer × Average lifetime in months
You need three inputs:
- Average revenue per customer, monthly and excluding GST or sales tax. (Your ARPU figure.)
- Gross margin, after the direct costs of delivering the service. See the gross margin guide for what belongs in those costs.
- Monthly churn rate, the share of customers who cancel each month. The churn rate formula page shows how to work it out properly.
Worked example: a B2B SaaS product
A project-management tool charges an average of $100 a month per customer. Hosting, support and payment fees come to $20 per customer, so gross margin is 80%. Each month, 2.5% of customers cancel.
- Average lifetime: 1 ÷ 0.025 = 40 months
- Monthly gross profit: $100 × 0.80 = $80
- LTV: $80 × 40 = $3,200
If you'd used revenue instead of gross profit, you'd have said $4,000. That's 25% too high, and you'd be making spending decisions on money that doesn't exist.
Why is churn the biggest lever in LTV?
Look at the formula again. Churn sits underneath everything.
Cut churn from 2.5% to 1.25% and the average lifetime doubles from 40 months to 80. LTV doubles with it, to $6,400. You didn't raise prices. You didn't cut costs. You just kept people longer.
That's why I spent a whole chapter of the book on churn. Groove, the help desk software company, found that users who left spent about 35 seconds per session, while those who stayed spent more than three minutes. It used that "red flag" to reach out early and cut churn by 71%. On the formula above, a 71% cut in churn more than triples lifetime value.
If your LTV looks weak, start with reducing churn before you touch anything else.
LTV CalculatorCustomer lifetime value for subscription businesses.Open the free tool →What is a good customer lifetime value?
There's no universal "good" LTV in dollars. A $3,200 LTV is excellent for a $25-a-month app and a disaster for enterprise software that costs $20,000 to sell.
That's why investors judge LTV against acquisition cost, not on its own. The 2026 Aleph and Benchmarkit SaaS report (full-year 2025 data from 342 companies) put the median LTV:CAC ratio at 4.1x, with the top quartile at 7.8x and the bottom quartile at just 1.1x. Read the LTV:CAC ratio guide for what those numbers mean for you.
For consumer subscriptions the dollar figures are much smaller. RevenueCat's State of Subscription Apps 2026, covering more than 115,000 apps, found the median first-year realized LTV was $30.16 for AI apps against $21.37 for non-AI apps. Then the catch: AI apps on monthly plans retained 36% worse over 12 months. High value per customer, short lives. That pattern shows up everywhere.
| Business | Typical inputs (illustrative) | LTV |
|---|---|---|
| B2B SaaS tool | $100/mo, 80% margin, 2.5% churn | $3,200 |
| Consumer app | $10/mo, 70% margin (after app store fees), 8% churn | $87.50 |
| Gym (Australia) | A$60/mo ex GST, 75% margin, 4% churn | A$1,125 |
| Cafe coffee club | A$40/mo ex GST, 40% margin, 6% churn | A$267 |
Work out your LTV in two minutes
Plug in your price, margin and churn, and the free LTV Calculator does the rest.
How should a gym or cafe use LTV?
You don't need a finance team for this. You need a spreadsheet and your membership software.
Worked example: a suburban gym
A gym charges A$66 a month including GST, which is A$60 a month ex GST. Direct costs per member (payment fees, towels, cleaning, the share of trainer time on the floor) come to about A$15. Gross profit is A$45 a month, a 75% margin.
About 4% of members cancel each month, so the average member stays 25 months.
LTV: A$45 × 25 = A$1,125.
Now the owner has a ceiling. Spending A$400 on ads and a free first month to win a member is fine. Spending A$1,200 isn't.
A cafe coffee club works the same way, but the margin is much lower because you're giving away product. If members pay A$40 a month and drink A$24 worth of coffee and milk at cost, your gross profit is A$16, not A$40. At 6% monthly churn, that's an LTV of about A$267. It's still worth having (members visit more often and buy food), but it tells you not to spend A$200 acquiring each one.
Two Australian notes. Always strip GST out of your revenue first, because that 10% was never yours. And if you run a gym membership or a cafe subscription, Australia's new subscription-trap rules start on 1 July 2027 and require an easy way to cancel plus notices during the subscription (renewal reminders are expected; check the final regulations). Plan on churn edging up, not down.
Free Subscription Profit Review
Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:
- whether a subscription model could work for your business
- how recurring revenue could cover your fixed costs each month
- how it could lift what your business is worth
No cost, no obligation. General information only until we understand your situation.
What are the most common LTV mistakes?
I see the same five over and over.
1. Using revenue instead of gross profit
This is the big one. Aleph and Benchmarkit call it "the most common distortion," and it hits low-margin businesses hardest. A subscription box with a 35% margin that reports revenue LTV is overstating customer value nearly threefold.
2. Letting low churn run to infinity
At 0.5% monthly churn, the formula says customers stay 200 months. That's nearly 17 years. Will your product, your market and your customer still exist in 17 years? Cap the lifetime at three to five years for planning. (WiseTech can argue for longer. You probably can't yet.)
3. Blending every customer together
Annual-plan customers churn differently from monthly ones, and referral customers often stay longer than paid-ad customers. Calculate LTV by plan and by channel to see where your best customers come from.
4. Measuring too early
Six months in, your churn reflects your keenest early adopters. Treat early LTV as a hopeful estimate, not a fact.
5. Forgetting the costs that grow with usage
AI features have changed this. If heavy users cost you more in model tokens than light users, average gross margin hides the problem. Check margin per customer segment, or use the AI gross margin calculator if your product runs on large language models.
How does LTV link to the rest of the book?
LTV is where three of the book's big ideas meet.
Churn (Chapter 9) sets how long customers stay. Land and expand (Chapter 7) sets how much they pay over time. And net dollar retention (Chapter 4), the metric behind Snowflake's and JFrog's IPO numbers, tells you whether existing customers are growing in value. If your net revenue retention is above 100%, the customers you already have are worth more every year, and your simple LTV formula is understating them.
Then there's valuation. Buyers pay more for long customer lifetimes and high margins, and LTV is one of the first numbers they rebuild from your data. The subscription valuation guide explains how.
What should you do next?
Here's your homework for this week:
- Pull 12 months of customer data and calculate your monthly churn rate.
- Work out gross margin per customer, ex GST.
- Run both through the formula and write the number down.
- Then ask yourself one question: what did I spend to win each of those customers?
That last question is the subject of the next page, on customer acquisition cost. Put the two together and you'll know whether your growth is making you money or quietly costing it.
Frequently asked questions
Is LTV the same as CLV or CLTV?
Yes. LTV, CLV and CLTV all mean customer lifetime value. Some finance teams use CLTV to make clear they mean the customer, not loan-to-value, which is what LTV means in banking and property. The formula is the same whichever acronym you use. What matters is whether you calculate it on revenue or on gross profit, so always say which.
Does LTV include customer acquisition cost?
No. LTV measures what a customer is worth after they're won. Customer acquisition cost (CAC) is measured separately, and the two are compared as a ratio. Some people subtract CAC from LTV and call it net LTV or customer profit. That's a useful number too, but label it clearly so nobody compares it with a standard LTV benchmark.
How do I calculate LTV with annual plans?
Convert everything to the same period. If customers pay $1,200 a year and 15% don't renew each year, annual LTV is $1,200 × gross margin ÷ 0.15. At 80% margin that's $6,400. Don't mix a monthly price with an annual churn rate, or you'll be off by a factor of twelve.
Should LTV include expansion revenue?
It can, but be conservative. If customers upgrade over time, net revenue churn (churn minus expansion) gives a higher LTV than logo churn. If expansion outweighs churn, the simple formula breaks because net churn is negative. In that case, model five years of cohort revenue directly rather than trusting a formula that shows an infinite answer.
How often should I recalculate LTV?
Quarterly is enough for most businesses. Use the trailing six or twelve months of churn so one bad month doesn't swing the number. Recalculate straight away after a price change, a new plan, or a change in how you acquire customers, because each one changes who your customers are and how long they stay.
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Robert Coorey, MBA
Robert is the author of The Subscription Playbook and Feed a Starving Crowd and a Director at BPAG Accountants in Sydney. More about Robert.
Sources
- The Subscription Playbook, Robert Coorey (2022), Chapters 5 and 7
- Aleph and Benchmarkit, CLTV:CAC ratio benchmarks for SaaS (2026 report, 2025 data)
- RevenueCat, The State of Subscription Apps 2026 in 10 minutes
- SaaS Capital, 2026 Spending Benchmarks for Private B2B SaaS Companies
Facts and prices checked 27 October 2026. Spotted something out of date? Tell us.