SaaS Unit Economics: How Churn Drives Customer Lifetime Value
Why a one-point change in monthly churn moves lifetime value more than most pricing tweaks, with a calculator you can run against your own numbers.
- Author
- Swagat Murmu
- Published
- Updated
- Reading time
- 2 min
- Category
- SaaS
Customer lifetime value, or LTV, answers one question: how much gross profit does an average customer generate before they leave? Churn is the term that controls the answer, and it controls it more than most founders expect.
The formula#
A simple and widely used model is:
LTV = ARPU x gross margin / monthly churn
ARPU is average revenue per user each month. Dividing by churn works because the expected customer lifetime is one divided by the churn rate. At 3% monthly churn the average customer stays about 33 months. At 2% they stay 50.
Run your own numbers#
The defaults below describe a company with 250 customers, 25,000 in MRR, 3% monthly churn, an 80% gross margin, and 900 spent to win each customer. Replace them with yours.
SaaS metrics calculator
Change an input and every figure updates. Nothing leaves your browser.
Average revenue per user: $100 a month
- Lifetime value (LTV)
- $2,667
- Gross profit per customer before they churn.
- Expected lifetime
- 33.3 months
- About 2.8 years on average.
- LTV to CAC
- 3 : 1
- Profitable, but below the common 3:1 rule of thumb.
- CAC payback
- 11.3 months
- Months of gross profit needed to earn back CAC.
- MRR lost to churn each month
- $750
- 7.5 customers leave each month.
- Customers retained after a year
- 69.4%
- $17,346 of today's MRR remains with no new sales.
What a change in churn is worth
Same revenue, margin and customers. Only monthly churn moves.
| Monthly churn | LTV | Change in LTV | MRR after 12 months |
|---|---|---|---|
| 1% (-2 pt) | $8,000 | +200% | $22,160 |
| 2% (-1 pt) | $4,000 | +50% | $19,618 |
| 3% (current) | $2,667 | baseline | $17,346 |
| 4% (+1 pt) | $2,000 | -25% | $15,318 |
| 5% (+2 pt) | $1,600 | -40% | $13,509 |
How these numbers are calculated
- ARPU = MRR divided by active customers.
- LTV = ARPU x gross margin divided by monthly churn.
- Expected lifetime = 1 divided by monthly churn, in months.
- CAC payback = CAC divided by monthly gross profit per customer.
- Retained after 12 months = (1 minus monthly churn) raised to the 12th power.
Reading the churn table#
With the defaults, ARPU is 100 and each customer earns 80 in monthly gross profit, so LTV is about 2,667. Cut churn from 3% to 2% and LTV rises to 4,000, a 50% increase. Let churn slip to 4% and it falls to 2,000.
The effect compounds over a year. At 3% monthly churn you keep about 69% of today's customers after 12 months with no new sales. At 2% you keep about 78%. Nine points of retained revenue is the gap between a flat year and a growing one.
What to do with it#
Treat the LTV to CAC ratio as a prompt for questions rather than a verdict. A ratio near 3 to 1 is a common rule of thumb, but payback time matters just as much for cash flow. If recovering CAC takes longer than your runway, a healthy ratio will not save you.
Before you spend on acquisition, find out why customers leave. A churn fix improves LTV, payback, and retention at the same time.
Share this article
Found this useful? Share it with others.