How churn drives the result
The formula assumes a steady share of customers leave each month, which makes the average lifetime equal to one divided by the churn rate. So small changes in churn have a big effect. Cutting churn from 4% to 3% extends the average lifetime from 25 months to about 33, adding a third to lifetime value without winning a single extra customer.
That makes this a good argument for investing in onboarding and support. The same dollar spent on retention can sometimes do more than a dollar spent on advertising.
The formulas
Average lifetime
Lifetime months = 1 ÷ Monthly churn rate
Lifetime value
LTV = Monthly revenue × Gross margin × Lifetime months
LTV to CAC
Ratio = LTV ÷ Customer acquisition cost
Worked example
A software company earns $100 a month per customer at a 70% gross margin. It loses 4% of customers each month and pays $500 to win each one.
- Average lifetime: 1 ÷ 0.04 = 25 months.
- Lifetime revenue: $100 × 25 = $2,500.00.
- Lifetime value: $2,500 × 70% = $1,750.00.
- LTV to CAC: $1,750 ÷ $500 = 3.5:1.
How far to trust the estimate
- New businesses have little data. With only a few months of history, your churn rate may change. Use a cautious estimate.
- The formula does not discount the future. A dollar earned three years from now counts the same as one today, so very long lifetimes can look better than they are.
- Churn varies by group. Annual plans, referred customers and large accounts often behave differently. Calculate separately where you can.
- Non-subscription businesses need an adaptation. Convert average order value and purchase frequency to monthly revenue, then treat the share of customers who do not return as churn.
Frequently asked questions
What is a good LTV to CAC ratio?
A ratio of 3:1 is an often-quoted rule of thumb, particularly in subscription software. It is only a guide. Payback time, your margins and how fast you want to grow matter too.
How do I calculate monthly churn?
Divide the customers lost during the month by the number you had at the start of the month. Averaging over several months gives a steadier number.
Should I use revenue or gross profit?
Gross profit is more meaningful, because it accounts for the cost of serving a customer. Comparing revenue-based lifetime value with acquisition cost overstates your return.
Why is a ratio far above 3:1 not always good?
A very high ratio might mean you are underinvesting in growth and could afford to spend more to win customers. It can also come from an optimistic churn estimate.