Customer Lifetime Value (LTV) Formula: How to Calculate It for a Startup

The customer lifetime value formula in one line

The customer lifetime value formula tells you how much gross profit an average customer brings in before they leave. For a subscription startup the simple version is LTV = ARPU × gross margin ÷ monthly churn rate, where ARPU is average revenue per user per month.

Each part answers a different question. ARPU asks what a customer pays, gross margin asks how much of that you keep after serving them, and churn asks how long they stay. Change any one of the three and LTV moves, which is why a single LTV number without its inputs tells you very little.

Founders reach for this number when they decide how much they can afford to spend on acquisition. If you do not know what a customer is worth, you cannot know whether a given marketing budget is smart or reckless.

A worked LTV example, step by step

Take an example B2C app with ARPU of $50 a month, gross margin of 80 percent and monthly churn of 4 percent. First, gross profit per customer per month is $50 × 0.80 = $40. Second, expected customer lifetime is 1 ÷ 0.04 = 25 months. Third, LTV = $40 × 25 = $1,000.

These figures are illustrative, not benchmarks. Their job is to show the mechanics: if you can acquire that customer for less than $1,000 all-in, the customer pays back over their life, and the gap between the two numbers is your margin for error.

How churn and margin change LTV

Churn is the lever founders underestimate. Keep the same example but cut monthly churn from 4 percent to 2 percent: lifetime doubles to 50 months and LTV doubles to $2,000, without raising prices or spending a dollar more on acquisition.

Margin matters almost as much. If gross margin falls from 80 percent to 60 percent at 4 percent churn, gross profit per month drops to $30 and LTV falls to $30 × 25 = $750. A discount that looks harmless on the pricing page can quietly remove a quarter of what each customer is worth.

Revenue LTV vs gross profit LTV

Many calculators multiply ARPU by lifetime and stop there. In our example that gives $50 × 25 = $1,250, which is 25 percent higher than the $1,000 you get after gross margin. Revenue-based LTV overstates what a customer is worth because it ignores the cost of serving them.

Use the gross profit version when you compare LTV with acquisition cost. Investors usually do, and a number that survives their scrutiny is more useful than a flattering one.

Common mistakes when calculating LTV

The first mistake is using a blended churn rate when your customers behave differently. A cohort that signed up through paid ads may churn far faster than one that came through referrals, so calculate LTV per segment when you have the data.

The second is using very little history. Churn measured over one good month can make LTV look huge. The third is forgetting that the formula assumes a steady churn rate, while real churn is usually highest in the first months and then flattens. Treat LTV as an estimate with a range, not a promise.

LTV for B2B, B2C and B2G customers

The same formula behaves differently across business models. A B2C subscription usually has a low ARPU and high churn, so LTV comes from volume and retention. A B2B product often has a higher ARPU and lower churn, so one lost account costs far more than one lost consumer.

B2G is different again. Contracts are long and churn is low once a deal closes, but the sales cycle can be slow, so LTV looks strong while cash arrives late. For a young company, a high LTV on paper does not help if the runway ends before the first payment, so read LTV together with your cash position.

Whatever the model, write down which churn definition you use. Counting lost customers, lost revenue or downgraded plans gives three different answers, and mixing them across reports is how teams end up arguing about numbers instead of decisions.

Three ways to raise LTV

First, cut churn: improve the first weeks of the product experience and talk to customers who leave to learn why. Second, raise margin by reviewing delivery costs line by line, such as support, infrastructure and payment fees. Third, raise ARPU with a higher plan for the customers who get the most value.

Test one change at a time and watch churn for at least one billing cycle. A price test that lifts ARPU 20 percent but pushes monthly churn from 3 percent to 6 percent destroys more value than it creates.

After each change, compare the new LTV with what it costs to win a customer. That ratio is covered in our LTV to CAC guide, and churn itself in the churn and retention guide. Together they show whether growth is making the company healthier or just busier.

Practicing the LTV trade-off in Founder Runway

In Founder Runway a run lasts 20 turns and every decision has four options. You choose a B2B, B2C or B2G model and a starting stage from Pre-Seed to Series A, then watch how pricing, retention and spending choices change your cash and runway.

The game does not ask you to compute LTV by hand and it is not financial advice. What it gives you is practice at the underlying instinct: a customer who stays longer and costs less to serve is worth more than a bigger launch.