Most pricing decisions are made by guessing what feels fair or by copying competitors. LTV gives you a principled answer: your price should be set so that your LTV:CAC ratio stays above 3:1. Below that and you're subsidising your customers. Above 5:1 and you're probably leaving acquisition on the table.
But LTV is only as useful as the inputs you put into it. Churn is the variable that almost always surprises founders — a 3% difference in monthly churn rate can change LTV by 200%.
The LTV Formula
There are simple and complex versions. Start with the simple version and add complexity only when you have reliable data to justify it.
Example: A SaaS product with £49/month ARPU, 72% gross margin, and 4% monthly churn:
The more complex LTV formula adds expansion revenue (upsells) and accounts for the time value of money. Use this when you have data on net revenue retention above 100%.
LTV by Customer Segment
Average LTV is almost always misleading. The real insight comes from segmenting by customer type, channel, or pricing tier — because LTV can vary 10× between your best and worst segments.
| Segment | ARPU | Monthly Churn | Avg Lifespan | LTV (70% margin) |
|---|---|---|---|---|
| Free trial converts | £29 | 8% | 12.5 mo | £254 |
| Monthly plan (£49) | £49 | 5% | 20 mo | £686 |
| Annual plan (£420/yr) | £35 | 1.5% | 67 mo | £1,642 |
| Pro tier (£99/mo) | £99 | 3% | 33 mo | £2,287 |
| Enterprise (£499/mo) | £499 | 1% | 100 mo | £34,930 |
The enterprise row isn't a typo. Annual plans + low churn + high ARPU compound into an LTV an order of magnitude higher than your typical monthly subscriber. This is why enterprise SaaS businesses can sustain very high CAC — the LTV justifies it.
How Churn Destroys LTV — A Worked Example
The impact of churn on LTV is non-linear and more severe than most founders expect. Let's model the same business at 5% vs 2% monthly churn.
The difference in LTV between 5% and 2% monthly churn is £1,659 per customer — on the exact same product at the exact same price. If you have 500 customers, that's £829,500 in LTV sitting on the table, accessible only by improving retention.
▸ CALCULATE_YOUR_LTV
See how churn and pricing change your LTV in real time
Plug in your ARPU, churn rate, and gross margin. Model the impact of different pricing strategies and churn reduction scenarios.
Calculate My LTV →LTV:CAC Benchmarks by Business Type
What counts as a healthy ratio varies by business model, sales cycle length, and capital intensity.
| Business Type | Target LTV:CAC | Reason |
|---|---|---|
| B2B SaaS (SMB) | 3:1 – 5:1 | Sales-assisted acquisition has high CAC; moderate retention |
| B2B SaaS (Enterprise) | 5:1 – 10:1 | Very long sales cycles mean CAC is high; retention offsets this |
| B2C SaaS / Consumer apps | 3:1+ | High churn risk; CAC must stay very low |
| E-commerce (repeat purchasers) | 3:1 – 4:1 | Repeat purchase rate is the primary LTV driver |
| Professional services | 5:1+ | Referral-heavy acquisition keeps CAC low |
| Media / content subscriptions | 4:1+ | Churn seasonality makes this volatile |
How to Improve Customer Lifetime Value
LTV improvement comes from three levers. They compound — small improvements across all three create a disproportionate LTV increase.
1. Reduce churn
This is always the highest-leverage action. Every percentage point of monthly churn you remove increases average lifespan dramatically. Churn reduction strategies: better onboarding (so customers reach value faster), proactive health scores (so you intervene before they cancel), annual billing (removes the monthly decision entirely), and in-app engagement features that make the product stickier.
2. Expand revenue (increase ARPU over time)
Expansion revenue is when existing customers pay more over time — via upsells to higher tiers, cross-sells to additional products, usage-based growth (more seats, more API calls), or annual plan adoption. Companies with net revenue retention above 100% can have negative effective churn, where expansion from existing customers more than offsets customers who leave.
3. Improve gross margin
Gross margin directly scales LTV because LTV = ARPU × margin × lifespan. Moving from 60% to 75% gross margin on the same revenue increases LTV by 25% with no change in price or retention. Typical SaaS margin improvement levers: infrastructure optimisation (cheaper compute), support automation (fewer support tickets per customer), and self-serve onboarding (reduces per-customer setup cost).
Frequently Asked Questions
What is the formula for customer lifetime value (LTV)?
The standard LTV formula is: LTV = ARPU × Gross Margin % × Average Customer Lifespan. For subscription businesses, average lifespan = 1 / monthly churn rate. So a business with £49 ARPU, 70% gross margin, and 4% monthly churn has LTV = £49 × 0.70 × 25 months = £857.50.
How does churn affect customer lifetime value?
Churn is the biggest single lever on LTV. At 5% monthly churn, average lifespan is 20 months. At 2% monthly churn, it's 50 months — 2.5× longer. Since LTV scales linearly with lifespan, cutting churn from 5% to 2% roughly 2.5× your LTV without changing price or margin at all.
What is a good LTV for a SaaS business?
There's no universal 'good' LTV — it has to be evaluated relative to CAC. The minimum viable LTV:CAC ratio is 3:1. An LTV of £300 is excellent if your CAC is £50; it's catastrophic if your CAC is £400. Focus on the ratio, not the absolute number.
How can I increase customer lifetime value?
Three levers: (1) Reduce churn — the highest-impact action, as churn directly sets the ceiling on LTV. (2) Expand revenue — upsells, cross-sells, and tier upgrades increase ARPU without new acquisition. (3) Improve gross margin — delivery cost reduction directly increases the margin component of LTV.
▸ CALCULATE_YOUR_LTV
See how churn and pricing change your LTV in real time
Plug in your ARPU, churn rate, and gross margin. Model the impact of different pricing strategies and churn reduction scenarios.
Calculate My LTV →