How this instrument works
This formula is a shortcut built on one assumption: that a customer has roughly the same chance of canceling every month, no matter how long they have already stuck around. Under that constant-churn model, the expected number of months before a customer leaves works out to 1 divided by the monthly churn rate — a 3% rate implies an expected tenure near 33 months. Multiplying average revenue per user by gross margin first converts revenue into the profit actually kept each month, then multiplying by that implied tenure projects the whole relationship's profit in one line.
SaaS finance and revenue-operations teams reach for this version specifically because ARPU and a churn percentage are numbers most subscription billing systems already report monthly, without needing a separately estimated retention span. That sets it apart from the general customer-lifetime-value model elsewhere on this site, built for a retailer or subscription box that tracks order size, purchase frequency and a stated average lifespan directly rather than deriving one from a churn percentage. A founder assembling a fundraising deck, or a RevOps lead sizing acquisition budgets, reaches for this version because that figure is already sitting in the dashboard.
The constant-churn assumption is also the model's biggest blind spot: real cohorts usually cancel faster in their first few months and settle into a steadier rate once they stick around, so one blended average smooths over a riskier early period. The formula also skips discounting later months back to today's dollars, and it ignores expansion revenue from upsells or contraction from downgrades entirely — it answers one narrow question, what is a customer worth if this month's churn rate held every month forever, not a full forecast.
- Enter Average revenue per user (ARPU), $/mo — the recurring monthly revenue one typical customer brings in.
- Enter Gross margin, % — the share of that revenue left after hosting, support and payment-processing costs.
- Set Monthly churn rate, % — the share of customers who cancel in an average month; it must stay above zero.
- Read Customer lifetime value (LTV), $ — the projected gross profit one customer returns under a flat monthly churn rate.
- Divide the result by a customer acquisition cost tracked elsewhere to see the ratio between the two.
Worked example — $100 ARPU at 3% monthly churn
Take a customer paying $100 a month, at an 80% gross margin and a 3% monthly churn rate — the exact figures on the default sheet. Gross margin converts revenue into kept profit first: $100 times 0.80 leaves $80 in monthly gross profit per customer. Dividing that $80 by the churn rate as a decimal, 0.03, returns $2,666.67 — the customer lifetime value this instrument reports for those three inputs.
That $2,666.67 carries an implied tenure of about 33 months, the same figure reached by dividing 1 by 0.03. Set against a customer acquisition cost tracked separately, this LTV is the number behind the commonly cited 3:1 LTV-to-CAC ratio some SaaS operators use as a rough marker of a channel worth continuing to fund — this sheet produces only the LTV half of that comparison, not the CAC figure or the ratio itself.
Questions
Why does dividing by churn rate estimate a customer's lifetime?
Under a model where a customer has the same chance of canceling every month regardless of tenure, the expected number of months before cancellation works out to 1 divided by the monthly churn rate — a 3% rate implies roughly 33 months, a 5% rate implies about 20. Real cohorts often deviate from that exact curve as usage settles over time, but the reciprocal is the standard shorthand SaaS teams reach for when only a single churn percentage is on hand.
How is this different from the general customer lifetime value calculator on this site?
The assumption behind each differs. This version derives an implied tenure from a churn percentage alone; the site's general customer-lifetime-value calculator instead asks for average order value, purchase frequency and a stated lifespan in years, which fits a retailer or subscription box tracking those figures directly. Reach for this one when a billing system already reports ARPU and monthly churn; reach for the other when order size and a known retention span are what you track instead.
Should Monthly churn rate be logo churn or revenue churn?
Logo churn — the formula assumes every dollar of ARPU disappears the instant a customer cancels, so entering a net revenue churn figure instead, which nets in expansion revenue from customers who stayed and upgraded, understates what this formula expects and inflates the lifetime value it returns. An improvement visible only in a lower net revenue churn belongs in a separate expansion-adjusted model, not folded into this field.
Why does gross margin appear in this formula at all?
Because lifetime value is meant to measure profit a customer returns, not the revenue they bring in — ARPU alone counts hosting, support tickets and payment fees as though they cost nothing. Multiplying by gross margin strips those costs out before the churn-adjusted total is produced, so the figure lands in dollars of profit, the number worth setting against what it cost to acquire that customer.
What causes this formula's estimate to run wrong?
Non-flat churn is the biggest gap — most SaaS cohorts cancel faster in their first months and settle into a steadier rate later, so one blended average smooths over a riskier early period. The formula also skips discounting future months to present value and leaves out expansion or contraction revenue entirely, which makes it a fast unit-economics estimate rather than a discounted forecast of one customer's cash flows.
How does this LTV figure get used against acquisition cost?
It forms one half of the LTV-to-CAC comparison: divide the figure this instrument returns by a customer acquisition cost tracked separately from marketing and sales records. A 3:1 ratio is commonly referenced in SaaS benchmarking discussions as a mark of a channel with room to keep scaling, though the number that actually matters shifts with cash runway, margin structure and how many months of gross profit it takes to recover CAC. This sheet produces only the LTV side of that ratio.
References
- U.S. Small Business Administration — Grow Your Business guide
- NYU Stern School of Business — Aswath Damodaran's valuation research
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.