What's more important than revenue to a SaaS founder? Customers.
Though, sometimes it can feel difficult to separate one from the other when you're deep into your startup's financials and business metrics. That may provide a plausible explanation as to why customer lifetime value (LTV) — the average revenue generated during a customer's entire relationship with a company — has become such a critical metric.
Revenue AND customers? Say no more.
Customer LTV actually says a lot about a SaaS business. For a growing startup, it's not only an indicator of product-market fit and future success, but also it can inform any number of critical business decisions, including:
When to increase (or decrease) your sales and marketing budget.
How much you should spend on customer success and retention.
What ICPs or verticals you should target to most efficiently grow the business.
There's just one catch: customer LTV can be a little more difficult to calculate, compared to other SaaS metrics. Difficult, but not impossible!
We walk you through some formulas and an example below so you can get started tracking customer LTV and stay on top of your startup's performance.
How to Calculate Customer LTV
There are several ways to calculate customer LTV that range from simple formulas based on customer success metrics, like Average Revenue per Account (ARPA) and Customer Churn, to complex predictive models.
Below, are two common formulas you can use to estimate customer LTV.
Customer LTV = Average Revenue Per Account (ARPA) / Customer Churn
Customer LTV = Average Revenue Per Account (ARPA) × Average Customer Lifetime
Before you get lost in repeating words here, let's clarify that 'Average Customer Lifetime' (not to be confused with Customer Lifetime Value) simply means how long an account engages in a paying relationship with your business on average. In other words, it's the average lifespan of your customer accounts.
SaaS LTV Calculation Example
SaaSy Co. offers three different pricing options for its CRM software: basic, professional, and enterprise. SaaSy Co. has 100 basic customers, 250 professional customers, and 75 enterprise customers. Its average customer lifetime varies by pricing plan.
$50 a month
$100 a month
$500 a month
Average customer lifetime
Basic: 12 months
Professional: 18 months
Enterprise: 24 months
With this data, we can calculate the company's LTV:
Customer LTV = [($50 × 100 × 12) + ($100 × 250 × 18) + ($500 × 75 × 24)] / 425 = $3,318
This means that, on average, SaaSy Co. can expect to generate $3,318 in revenue per customer.
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