Customer Lifetime Value (LTV), for solo SaaS founders

The two formulas you'll see

LTV has two common formulas. They give different numbers, and which one you use depends on whether you want a directionally-useful metric or something defensible to a finance team.

The simple version — the one you see in every Twitter thread:

If your average revenue per account (ARPA) is $50/month and your monthly churn is 5%, your LTV is $1,000. The math: a customer churning at 5%/month has an expected lifetime of 1/0.05 = 20 months, × $50 = $1,000.

The accurate version — the one David Skok and most SaaS-finance literature insist on:

This matters because LTV should reflect the dollars you actually keep, not the top-line revenue. If you're running on Stripe and Vercel and OpenAI APIs, your gross margin might be 75–85%. That same $50 ARPA / 5% churn customer is worth $750–$850 in actual gross profit, not $1,000. David Skok's SaaS Metrics 2.0 essay remains the standard reference.

Worked example

You sell a $29/month productivity tool. After 18 months of operation, your monthly logo churn is 6.5%, and your gross margin (after Stripe fees, OpenAI API, hosting, and payment-processor fees) is 78%.

• Simple LTV: $29 / 0.065 = $446
• Accurate LTV: ($29 × 0.78) / 0.065 = $348

The simple version overstates by 28%. That's the difference between "I can spend $150 to acquire a customer" (using a 3:1 ratio against simple LTV) and "I can spend $116" (against accurate LTV). At scale, that gap is the difference between profitable and bleeding cash.

LTV:CAC ratio — the famous rule and where it breaks

The most quoted rule in SaaS is: LTV:CAC should be at least 3:1. That is, for every dollar you spend acquiring a customer, you should expect three dollars back over their lifetime. Below 3:1 you're burning money; above 5:1 you're probably underspending on growth.

The rule comes from observed patterns in venture-backed SaaS companies in the 2010s. It's a useful heuristic. It's also wrong for solo founders in three specific ways:

1. The denominator (CAC) lies if you don't price your time. If your spreadsheet says CAC = $0 because you're writing free SEO content, your LTV:CAC ratio is infinite. Useful insight: zero. See our breakdown of CAC for solo founders.
2. The numerator (LTV) lies when your sample is too small. If you have 30 customers and you've been operating for 6 months, your "churn rate" is statistical noise. A single cancellation moves the number by 3 percentage points.
3. The 3:1 rule was calibrated for businesses that need to fund a sales team. Solo founders don't. A 1.5:1 ratio that throws off cash and is sustainable can be a great solo-founder business; a 5:1 ratio that requires perfect retention to work is fragile.

At scale (say, $25K MRR with 12+ months of churn data), LTV:CAC starts to be useful. Below that, it's a vanity calculation. Our piece on which metrics actually matter argues that for solo founders below $5K MRR, raw retention curves and customer-conversation notes beat any ratio.

How LTV changes by SaaS type

Business type	Typical LTV behavior	What to watch
B2B SaaS, monthly	$500–$3,000 typical; churn 3–7%/mo	Logo churn dominates; measure cohorts
B2B SaaS, annual	2–3× the monthly-equivalent LTV	Renewal rate (annual), not monthly churn
B2C subscription	$80–$300; churn 8–15%/mo	Churn spikes early; lifetime is short
Freemium SaaS	Compute LTV on paid users only, then weight by free-to-paid conversion	The conversion rate, not LTV, is the lever
Usage-based	Highly variable by account; calculate per-segment	Net revenue retention > logo retention

The biggest LTV mistake in B2B is using monthly churn for an annual-contract business. If your customers commit for a year and then 80% renew, your "monthly churn" calculated naively is roughly 1.8% — but that number is meaningless because the renewal decision happens once a year, not every month. Use renewal rate for annual contracts.

For B2C, the issue is that churn is wildly non-linear over time. Most subscriptions lose 30–50% of customers in the first 90 days, then stabilize. A simple LTV formula assumes constant churn and overstates badly. Cohort analysis tools like PostHog let you look at the actual retention curve instead of fitting a single rate.

When solo founders should use LTV

LTV is a decision tool. It helps you answer specific questions:

• Channel-investment decisions. "Should I keep running these ads?" needs an LTV number to compare against CAC. Without it, you're flying blind.
• Pricing decisions. Raising your price by 20% might lower conversion by 10%, but if it raises LTV by 18%, you're ahead. Our pricing playbook walks through this trade-off.
• Retention investments. Should you build that onboarding email sequence? If it improves churn from 6% to 5%, your LTV jumps 20%. That's often a 40-hour project worth tens of thousands in expected value.
• Decision: free vs paid trial. The right call depends on which path produces a higher LTV per signup, and you can't evaluate that without the metric.

When LTV is a vanity number

And the cases where calculating LTV is theatre:

• You have fewer than ~50 customers. Your churn rate is one or two cancellations away from doubling or halving. The LTV calculation will swing wildly month to month.
• You've been operating less than 6 months. You don't know your churn yet. The customers who will churn at month 9 haven't had a chance to. Early-stage churn is always understated.
• You're still bootstrapping with no marketing spend. What decision is the LTV informing? If your acquisition is "write content and wait," the CAC side of the ratio is fictional, so the ratio is fictional.
• Your revenue mix is changing. If you just raised prices or launched a new tier, your historical ARPA doesn't reflect current customers. Recompute when the dust settles.

In these cases, what should solo founders track instead? Three things: (1) MRR growth rate, (2) raw retention — how many of last quarter's customers are still here? — and (3) qualitative signal from customer conversations. These tell you more about the trajectory than a noisy LTV number.

The bottom line

LTV is one of the most powerful concepts in SaaS finance and one of the most misused. Use the gross-margin version, not the simple version. Apply the 3:1 rule with skepticism — it was designed for VC-backed companies, not bootstrapped solo founders. And recognize that for the first 6–12 months of any SaaS, your LTV is a guess wrapped in a calculation. Once you have real data, LTV becomes a steering wheel for channel and pricing decisions; before that, it's a comforting fiction. The founders who build durable solo SaaS businesses tend to obsess less over the number and more over the underlying behaviors that shape it: onboarding, support response time, and whether customers actually use the product after week two.