Practical guide
Customer LTV formula: include gross margin and monthly churn
Calculate gross-margin-adjusted customer lifetime value and see how margin changes the estimate.
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How does this customer LTV formula work?
The tool estimates customer lifetime value as monthly revenue per customer × gross margin ÷ monthly customer churn. It is a steady-state model: revenue, margin, and churn are assumed to remain constant over the modeled customer relationship.
A margin-adjusted example
Use hypothetical monthly revenue of $120 per customer, 75% gross margin, and 3% monthly customer churn. Monthly gross profit per customer is $90. Estimated LTV is $90 ÷ 0.03 = $3,000.
Ignoring gross margin would produce $120 ÷ 0.03 = $4,000. That revenue-only estimate is $1,000 larger because it does not subtract the modeled cost of serving the customer. Use the margin-adjusted figure when comparing with acquisition spending on the same basis.
In the calculator, enter percentages as 75 and 3, not 0.75 and 0.03. Keep the revenue period monthly because the churn input is monthly. Combining annual revenue with monthly churn would inflate the result.
What the model assumes
The reciprocal of 3% churn is about 33.33 months. This is a mathematical implication of a constant churn model, not evidence that every customer stays exactly that long. A new product with a short history may not have enough observations to support that lifetime assumption.
Separate materially different customer groups before deciding which figure to use. A low-price self-serve plan and a long enterprise contract can have different revenue, cost, and cancellation patterns; one blended ratio may conceal them.
LTV questions
What happens when churn is zero?
Division by zero does not produce a usable finite lifetime estimate. The tool returns zero in this case. Treat that display as a model limit, not as evidence of zero customer value or an infinite lifetime.
Is this a discounted cash-flow model?
No. It does not discount future cash flows, model expansion, schedule contracts, or fit retention cohorts. Use observed cohort contribution over a stated horizon when those details materially affect your decision.
Use the ltv calculator to reproduce the scenario with your own inputs.