What is customer lifetime value, and how do I work out mine?

Written by Dante, who built Prep66, PrepAMT and Ancestorii

Customer lifetime value, LTV for short, is what one customer pays you before they leave. For a subscription, take what a customer pays you each month and divide it by your monthly churn rate. An example in round numbers: say a customer pays $20 a month and 5% of your customers leave each month. $20 divided by 0.05 is $400. David Skok's definitions give that sum. Stripe's dashboard documentation uses the same one and calls the result an estimate. Until your customers have had time to leave, the churn rate in it is a guess, and so is the answer.

Where the definition comes from

The definition investors use is stricter than the plain one. It counts profit, not revenue.

Lifetime value is the present value of the future net profit from the customer over the duration of the relationship.
A common mistake is to estimate the LTV as a present value of revenue or even gross margin of the customer instead of calculating it as net profit of the customer over the life of the relationship.

Andreessen Horowitz, 16 Startup Metrics, 21 August 2015, metric 5

In plain words: what a customer pays, less what it costs you to serve them, for as long as they stay. Present value means money due years from now counts for less than money today, a step this page leaves out.

How to work it out, step by step

Work out what one customer pays you a month, on average. If everyone is on one $20 plan, it is $20.
Work out your monthly churn rate. Say it is 5%.
Divide 1 by the churn rate to get how long a customer stays. Skok's definitions call this the customer lifetime, and give 3% a month as 33 months. Here, 1 divided by 0.05 is 20 months.
Multiply the months by the monthly payment: 20 times $20 is $400. The formula in words: monthly payment per customer, divided by monthly churn rate.
Take off what each customer costs you. Andreessen Horowitz counts the revenue from a customer minus the variable costs associated with them, and Skok multiplies by gross margin. If serving a customer costs you $4 of each $20, the sum is $16 times 20, which is $320.

Keep the periods the same: Skok notes that a monthly payment needs a monthly churn rate. A product bought once has no churn rate, and its sum is in the questions below.

Why the figure is a guess until customers have left

The sum assumes the share of customers leaving each month never changes. Skok's definitions build it by applying a constant churn rate every month to a group of 100 customers. A product that is three months old has no customer who has stayed 20 months, so the 20 is a forecast.

It also swings hard. In the example, 5% churn gives $400. At 10% the answer is $200. At 2.5% it is $800. With few customers, one cancellation can move the churn rate that far.

Note, if you have only few months of data, the conservative way to measure LTV is to look at historical value to date. Rather than predicting average life span and estimating how the retention curves might look, we prefer to measure 12 month and 24 month LTV.

Andreessen Horowitz, 16 Startup Metrics, metric 5

Historical value to date is what customers have really paid you so far. If your oldest customer joined four months ago at $20 a month, the most any customer has paid is $80. That is the figure you know. $400 is the figure you hope for.

Skok's essay on lifetime value warns early companies directly.

But it's important to note that these formulae will only yield meaningful results when your sales and marketing process and costs are predictable and scalable.

David Skok, What's your TRUE customer lifetime value (LTV)?

The ratio of 3, and whose rule it is

Lifetime value is set beside customer acquisition cost: what a customer pays you against what it cost to win them. The rule that the first should be more than 3 times the second is David Skok's.

Our guideline for a successful SaaS business is that this number should be higher than 3.
(The guideline assumes you are using the simpler LTV formula that does not include a Gross Margin adjustment, and that you have a Gross Margin of 80% or higher.)

David Skok, SaaS Metrics 2.0: Detailed Definitions, on the ratio of lifetime value to acquisition cost

The simpler formula is the one before costs: the $400 in the example, not the $320. This is one writer's guideline for subscription software, not a measured average. His essay on lifetime value says a ratio greater than 3 was what he had previously recommended, and that an updated recommendation would follow. A ratio built on a guessed lifetime value is a guess too.

The mistakes a new founder makes

Counting revenue as if it were profit. The first quote on this page names it as the common mistake. Payment fees, hosting and support come off first.
Spending against the whole figure. The $400 arrives over 20 months, $20 at a time. An advert is paid for on day one. Pay $300 to win a customer worth $400 and you are $280 short after the first month.
Stating the figure without its base. Say how many customers and how many months it rests on, every time.

Where it matters

It matters wherever a customer has a price. On Google Ads, Meta Ads, Reddit Ads and TikTok Ads you pay before anyone buys, and lifetime value is the ceiling on what one customer may cost. A commission paid through referrals and affiliates comes out of the same figure.

There are two ways to raise it. Charge more, which is pricing. Or keep customers longer, which is churn and retention.

How Sami uses it

Sami works from the numbers you give it and the records AskSami keeps. Once you sign up, the payment exports you hand over become dated records, and payments come from your own payment webhook, each tied to its source where the snippet in your product recorded one.

Where the record is too short to show how long customers stay, Sami says it has no data and does not invent a lifetime value.

Questions people ask

What is a good LTV to CAC ratio?

The rule of thumb is David Skok's. His definitions page says the ratio should be higher than 3 for a successful SaaS business, and assumes a gross margin of 80% or higher. It is a guideline, not a measured average.

How do I calculate lifetime value with no churn data yet?

You cannot do the full sum, because there is no churn rate to divide by. State what customers have really paid you so far, which Andreessen Horowitz calls historical value to date, and say how many months it covers.

Is lifetime value revenue or profit?

Strictly, profit. Andreessen Horowitz defines it as the net profit from the customer over the relationship, and calls counting revenue a common mistake. The plain sum gives a figure before costs, so say which one you mean.

How do I work out lifetime value for a one time purchase?

Start from the average order value multiplied by the number of orders, as Andreessen Horowitz does, and take off the costs. If customers buy once and never return, the lifetime value is that one sale, less its costs.

Sources

David Skok, For Entrepreneurs, SaaS Metrics 2.0: Detailed Definitions, 4 July 2014 in the page's own metadata. Read on 8 October 2026.
Stripe Docs, Analytics, in the Stripe Billing documentation. Read on 8 October 2026.
Andreessen Horowitz, 16 Startup Metrics, posted 21 August 2015. Read on 8 October 2026.
David Skok, For Entrepreneurs, What's your TRUE customer lifetime value (LTV)? DCF provides the answer, 10 December 2015 in the page's own metadata. Read on 8 October 2026.

Checked on 17 October 2026. Every rule, price and figure on this page was read on the page it links to, on the day shown beside it above. They change, so open the source before you rely on one.