LTV Calculator

How to use the LTV calculator

1. Choose how customers pay you. Pick subscription if they pay a regular fee, such as software, a membership or a retainer. Pick repeat purchases if they buy when they need to, such as a shop, a bakery or a cleaning service.
2. Subscription: enter what an average customer pays each month and your monthly churn rate, which is the share of customers who cancel in a month.
3. Repeat purchases: enter the average order value, how many times a customer buys in a year and how many years they keep buying.
4. Gross margin: the share of revenue left after the direct cost of serving a customer, such as ingredients, hosting or payment fees.
5. Cost to win a customer (optional): enter your CAC to see the LTV to CAC ratio. If you do not know it, work it out with the CAC calculator.

The result updates as you type. It shows LTV, the average customer lifetime, lifetime revenue, gross profit per customer, the LTV to CAC ratio and the CAC that would give you a 3:1 ratio.

The LTV formula

Several versions of customer lifetime value are in use. Some count revenue only. This calculator uses the common gross margin version, because revenue you have to spend on serving the customer is not yours to keep. It also shows lifetime revenue on its own line so you can see both.

A worked example for a subscription

Say you sell a tool for $50 a month. Your gross margin is 75%, 5% of customers cancel each month and it costs you $150 to win a customer.

Now see what churn does. If 10% of customers cancel each month instead of 5%, the average lifetime halves to 10 months and LTV halves to $375. The ratio drops to 2.5:1 without any change in price or CAC.

A worked example for repeat purchases

Say you run an online shop. Switch the calculator to repeat purchases. An average order is $40, a customer buys 6 times a year and stays for 2 years. Set gross margin to 50% and CAC to $60.

How to read your LTV and raise it

LTV is the gross profit an average customer brings in before they leave, so it sets a ceiling on what you can afford to spend to win one. In his SaaS Metrics 2.0 guide, investor David Skok writes that the strongest software subscription businesses have an LTV to CAC ratio higher than 3. He calls it a guideline, and it comes from software, so treat it as a rough reference point for other kinds of business. The calculator shows green at 3:1 or above, amber between 1:1 and 3:1, and red below 1:1, where each customer costs more than they bring in.

• Keep customers longer. Find out why people leave by asking them. A customer interview with five people who cancelled often tells you more than a dashboard.
• Raise what each customer pays. Test a higher price, an annual plan or an add-on. Your pricing strategy affects LTV as directly as churn does.
• Improve your margin. Cheaper suppliers, fewer manual steps and lower payment fees all raise the profit in every sale.
• Sell to the people who stay. Look at your longest-standing customers and aim your marketing at more people like them.

If you have not launched yet, you will not have real churn or repeat rates. Use careful guesses, write them down as assumptions, and put them in the financial part of your business plan. Fonda's 14-step journey has a Key metrics step in its Scale phase, after you have validated the idea and launched.

What the calculator leaves out

• Changing churn. It assumes the same share of customers leaves every month. In practice, new customers often leave faster than old ones.
• Upgrades and price changes. It assumes each customer pays the same amount for their whole lifetime.
• The time value of money. A dollar received in three years is counted the same as a dollar today. Finance teams often apply a discount rate; this calculator does not.
• Costs outside gross margin. Support, rent, salaries and your own pay are not subtracted, and neither is CAC. LTV here is gross profit before the cost of winning the customer.
• Referrals. Customers who bring in other customers are worth more than the figure shown.

With only a few months of data, the churn rate you enter can be far off, and LTV will be too. Recalculate every quarter.