- Use gross profit, not revenue.
- Apply a monthly survival rate.
- Discount far-off months.
The steps
Start with monthly revenue per account, multiply by gross margin, then multiply by (1 - churn) raised to the month number. Divide by one plus the monthly discount rate raised to the same month number, and sum across 60 months.
Worked example
An account paying $80 a month at a 70% margin with 4% monthly churn and a 10% annual discount rate has a five-year LTV of about $1,114. Without discounting it would be about $1,279 over the same horizon, which shows why discounting matters.
What to do with it
Compare LTV with acquisition cost. A ratio near 3 to 1 is a common benchmark. A low ratio points to cutting churn or acquisition cost before spending more.
What is a customer worth month by month?
Questions about Unit Economics and Measurement
Why use a five-year horizon?
Forecasts beyond five years are very uncertain, so most teams cap the horizon.
Should I use revenue instead?
No. Revenue overstates value because product and service costs are still owed.
Key terms
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