Churn RatevsLifetime Value (LTV)

Churn rate measures the percentage of customers who cancel or stop paying during a given time period. It is the silent killer of SaaS businesses — even a small monthly churn compounds into massive annual losses. A 5% monthly churn sounds manageable, but compounded over 12 months, you lose 46% of your customer base. To maintain the same revenue, you need to acquire enough new customers to replace nearly HALF your base every year. This is why the best SaaS companies obsess over churn — Slack's monthly churn below 1% means they retain 89% of customers annually, creating a compounding revenue machine.

Lifetime Value is the total revenue you can expect from a single customer over the entire duration of your relationship. It is the most critical number for understanding how much you can afford to spend on acquiring customers. The simplest formula: LTV = ARPU ÷ Monthly Churn Rate. A customer paying $100/month with 5% monthly churn has an LTV of $2,000. Netflix's LTV exceeds $1,200 per subscriber because churn is below 2.5% — this justifies their $17B+ annual content spend. LTV is the roof of your building: it determines the maximum CAC you can afford, the features you can build, and the team you can hire.

The trap is tracking only 'logo churn' (customers lost) and ignoring 'revenue churn' (revenue lost from downgrades). You could have 3% logo churn but 8% revenue churn if your largest customers are downgrading. Revenue churn is more dangerous because it hits your top line harder. The second trap: calculating churn from the wrong denominator. Always use start-of-period customers, not end-of-period or average. Using end-of-period inflates your denominator and makes churn look artificially low.

Most founders massively overestimate LTV by assuming customers will stay forever. In reality, early-stage startups have limited cohort data. A startup with 6 months of history claiming $3,000 LTV is extrapolating a trend that hasn't been validated. Use conservative estimates (12-24 months cap) until you have 3+ cohorts with 12+ months of data. Also, LTV should be calculated on gross margin, not revenue — a $2,000 LTV with 50% gross margin means only $1,000 in actual profit to cover acquisition costs.

Calculate two churn metrics monthly: Logo Churn = Customers Lost ÷ Start-of-Month Customers × 100. Revenue Churn = MRR Lost (cancellations + downgrades) ÷ Start-of-Month MRR × 100. Implement an exit survey on your cancellation page to identify the #1 reason people leave — the top reason is usually fixable. Target: under 5% monthly for SMB SaaS, under 2% for mid-market, under 1% for enterprise.

Calculate LTV two ways: (1) Simple: ARPU ÷ Monthly Churn Rate. (2) Cohort-based: track actual revenue from each monthly cohort over time. Compare them — if your cohort LTV is lower than your formula LTV, your churn rate is misleading you (possibly due to early-life churn spikes). Always report Gross Margin-adjusted LTV: LTV × Gross Margin. This is the number that matters for unit economics.