Question of the day
2026-07-27
How do you calculate LTV and LTV/CAC? A customer pays $12,000 per year, gross margin is 75%, annual churn is 15%, and CAC is $15,000.
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
The standard formula is LTV = ARPA x gross margin / churn rate. Here: $12,000 x 75% = $9,000 of annual gross profit per customer; with 15% annual churn the expected customer lifetime is 1 / 0.15 = about 6.7 years, so LTV = $9,000 / 0.15 = $60,000. LTV/CAC = $60,000 / $15,000 = 4.0x. A common rule of thumb treats roughly 3x as healthy. Gotchas: the simple formula assumes constant churn and no expansion, ignores discounting, and technically breaks when NRR exceeds 100% - always flag those assumptions.
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