Customer Lifetime Value for SaaS: The Formula Founders Get Wrong
LTV is one of the most cited metrics in SaaS — and one of the most misunderstood. Here is the right way to calculate it as an indie founder.
Customer Lifetime Value (LTV) is the total revenue you can expect from a customer over their entire relationship with your product. It sounds simple, but most founders calculate it wrong — and the error leads to bad pricing and acquisition decisions.
The formula
LTV = ARPU ÷ churn rate. If your average customer pays $50/month and your monthly churn is 5%, your LTV is $1,000. This is the simplified version that works for early-stage products.
The mistake most founders make
They use gross revenue instead of gross margin. A $1,000 LTV on a product with 40% gross margin is actually a $400 LTV from a profitability standpoint. Always calculate LTV on a margin basis when comparing it to acquisition costs.
LTV:CAC ratio
The relationship between LTV and Customer Acquisition Cost (CAC) is the real metric. A healthy SaaS business has an LTV:CAC ratio of at least 3:1 — meaning every dollar spent acquiring a customer returns at least three dollars in lifetime value.
Why LTV matters for bootstrapped founders
You do not need a 3:1 LTV:CAC ratio when your CAC is near zero (word of mouth, SEO, build in public). But knowing your LTV helps you decide how much you can afford to spend on paid acquisition — and whether your pricing is leaving money on the table.
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