How to Calculate Customer Lifetime Value (LTV) in 3 Steps

Customer Lifetime Value (LTV) tells you how much total revenue a single customer generates over their entire relationship with your business. It is one of the most critical metrics for SaaS profitability and sustainable growth.

Below are the three practical steps every SaaS founder and finance team should use to calculate LTV accurately.

Step 1: Calculate Average Revenue Per Customer

Start by determining how much revenue each customer generates per month.

Average Revenue Per Customer =
Total Monthly Revenue ÷ Total Active Customers

Step 2: Determine Customer Lifetime

Customer lifetime is based on churn. If your monthly churn rate is 5%, the average customer stays for 20 months.

Customer Lifetime (months) =
1 ÷ Monthly Churn Rate

Step 3: Multiply Revenue by Lifetime

Now combine revenue and retention into one powerful number.

Customer Lifetime Value (LTV) =
Average Revenue Per Customer × Customer Lifetime

Why LTV Matters

• Sets sustainable customer acquisition budgets
• Improves investor confidence
• Aligns sales, marketing, and product strategy