Customer Lifetime Value for Subscription Businesses
How to calculate LTV for subscribers, segment it by acquisition channel and plan tier, and use it to make smarter CAC investment decisions.
The LTV Formula for Subscriptions
For subscriptions, LTV can be calculated directly from churn rate:
LTV = ARPU ÷ Monthly Churn Rate
Example: ARPU = £30/month, monthly churn = 3%. LTV = £30 ÷ 0.03 = £1,000.
This formula assumes churn rate is constant (which it never is, but it's a useful approximation). For a more accurate calculation, use cohort-based LTV — tracking the actual revenue generated by a cohort of subscribers from acquisition to full churn.
Gross Margin LTV vs Revenue LTV
The formula above gives revenue LTV — total revenue per customer over their lifetime. For business decisions, gross margin LTV is more useful — it tells you how much gross profit each customer generates.
Gross Margin LTV = LTV × Gross Margin %
If your subscription has 70% gross margin: Gross Margin LTV = £1,000 × 70% = £700.
The CAC:LTV ratio should always be calculated against gross margin LTV, not revenue LTV — otherwise you are comparing your acquisition cost against revenue that includes your cost of goods.
LTV by Segment
Average LTV hides important variation. Segment LTV by:
Acquisition channel — LTV of customers from paid search vs. organic vs. referral is often dramatically different. Customers from referral programmes typically have 30–50% higher LTV than paid acquisition.
Plan tier — annual subscribers typically have 2–3× the LTV of monthly subscribers (lower churn, higher ARPU).
Cohort — early cohorts may have different LTV from recent cohorts if product or pricing has changed.
Ask AskBiz: *'What is the average LTV of customers acquired via referral vs paid ads over the last 12 months?'* to surface these differences.
Using LTV to Set Your CAC Budget
LTV tells you how much you can afford to spend to acquire a customer (CAC) and remain profitable.
The industry-standard benchmark for a sustainable subscription business is CAC:LTV ratio of 1:3 — meaning for every £1 you spend on acquisition, you generate £3 of gross margin LTV.
Working backwards: if Gross Margin LTV = £700 and you want a 1:3 ratio, your maximum sustainable CAC = £700 ÷ 3 = £233.
If your current CAC is £350, you are destroying value on every acquisition — either reduce acquisition costs or increase LTV (higher ARPU or lower churn).