What this calculator does
This calculator establishes what a SaaS customer is worth across their lifetime and whether you can afford to win them. Enter average monthly revenue per customer, monthly churn, gross margin, and customer acquisition cost, and it returns lifetime value, the LTV to CAC ratio, and the average customer lifetime in months that your churn rate implies.
The ratio is the figure that carries weight. LTV in isolation is a projection of revenue that has not yet arrived. Placed against what you spent to acquire the customer, it becomes a judgment on whether growth creates or destroys value — which is the first thing any investor will test.
When to use it
The usual trigger is a decision about acquisition spend. Before raising paid budget, hiring a salesperson, or signing an agency retainer, LTV establishes the ceiling above which winning a customer stops making sense.
It is equally the right tool for weighing retention against acquisition. Because LTV moves inversely with churn, running one scenario with lower churn and another with lower CAC usually shows retention producing more value per pound spent. That comparison is often the most persuasive case for funding onboarding and customer success ahead of yet another marketing channel.
Understanding the inputs
Average monthly revenue per customer should be recurring subscription revenue net of VAT. Exclude implementation fees and professional services, which do not repeat and will inflate the lifetime figure if left in.
Monthly churn is customers lost during a month over customers at the start, with new signups excluded from the denominator. Gross margin should reflect cost of sales — hosting, third-party services, support, and onboarding — and typically sits between 70 and 85 percent for a healthy SaaS business. CAC is total sales and marketing cost for a period, including salaries and employer National Insurance, divided by new customers won.
How is this calculated?
LTV = (Avg Revenue × Gross Margin %) / Monthly Churn. LTV:CAC = LTV / CAC. Aim for LTV:CAC > 3.
A worked example
A UK SaaS product charges £95 a month, runs a 78 percent gross margin, and loses 3 percent of customers each month. Each customer contributes roughly £74 monthly, implied lifetime is about 33 months, and LTV comes to around £2,470. Against a CAC of £900 the ratio is 2.7 to one, with payback at roughly 12 months.
Reduce churn to 2 percent and implied lifetime stretches to 50 months, lifting LTV to about £3,705 and the ratio to 4.1. That single percentage point is worth £1,235 per customer. Achieving the same ratio through acquisition would require cutting CAC from £900 to roughly £600, which is usually the harder path.
Limitations and assumptions
The formula assumes churn holds constant indefinitely, which no cohort does. Real churn concentrates in the first ninety days, so a constant-rate model overstates value for early customers and understates it for survivors. It also ignores expansion revenue and any discount rate, so value realised over five years is treated as equal to cash today.
It treats every customer as identical, which fails badly where contract values differ widely. For board packs or a fundraise, use cohort retention curves and net revenue retention rather than this single-point estimate. Use the calculator to test acquisition spend and compare scenarios, not as a figure to present as fact.
Common Questions
- What is a good LTV:CAC ratio?
- Three to one is the widely used rule of thumb for B2B SaaS, though it shifts with stage and sector. Below one you lose money on each customer. Between one and three the model functions but leaves little for reinvestment. Well above five often indicates underinvestment in growth rather than exceptional efficiency.
- Why does LTV use gross margin rather than revenue?
- Because revenue consumed by hosting, support, and onboarding cannot fund acquisition. A customer paying £95 a month at 78 percent gross margin contributes about £74. Running LTV on the full £95 overstates it by a quarter and makes marginal channels look viable when they are not.
- How do I calculate monthly churn properly?
- Divide customers lost in the month by customers at the start of that month, keeping new signups out of the denominator. Including them dilutes the rate and flatters the result. If you sell annual contracts, calculate annual churn and convert, since monthly logo churn means little on annual terms.
- Should I measure logo churn or revenue churn?
- Revenue churn is more honest where contract values vary, because one departing enterprise account can outweigh twenty small ones. This calculator applies a single churn rate to an average revenue figure, so if your base is highly uneven, run each segment separately rather than blending everything together.
- What about expansion and upsell revenue?
- The model excludes it, which makes the output conservative. Businesses with net revenue retention above 100 percent — where expansion exceeds churn — have genuinely higher lifetime value than this formula suggests. If that describes your book, treat the result as a floor and model expansion separately alongside it.
- Why does a small churn improvement move LTV so much?
- Because the formula divides by churn, so the relationship is hyperbolic rather than proportional. Going from 3 percent to 2 percent monthly churn lifts implied lifetime from 33 months to 50 and raises LTV by half. Retention investment routinely outperforms acquisition investment at equivalent cost.
- How does VAT affect these figures?
- Use net-of-VAT subscription revenue throughout. VAT charged to UK customers is collected for HMRC and never belongs to the business, so including it inflates both ARPU and LTV by 20 percent. For customers outside the UK the position differs, but the calculator should always see net revenue.
- Should LTV set my acquisition budget?
- It sets a ceiling rather than a budget. With LTV at £2,470 and a three-to-one target, CAC should stay below about £820. But LTV accrues over years while CAC leaves the bank today, so payback period should govern how hard you actually push, especially when the runway is finite.
- Does LTV vary by acquisition channel?
- Considerably, and the blended figure hides it. Customers arriving through referral or organic search generally churn less than those from paid channels or discounted trials. Calculate per channel where volume allows — the ranking frequently inverts once retention is included rather than signups alone.