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SaaS Customer Lifetime Value (LTV) Explained

  • Writer: Lighter Capital
    Lighter Capital
  • Jun 29, 2023
  • 2 min read

Updated: May 7, 2024

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.


Calculating customer lifetime value (LTV) for a SaaS business

Customer lifetime value 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 customer retention

  • What ICPs or verticals you should target to most efficiently grow the business


There's just one catch: customer lifetime value 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 lifetime value and stay on top of your startup's performance.


How to Calculate SaaS Customer Lifetime Value

There are several ways to calculate customer lifetime value 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 lifetime value (LTV).


Formula 1

Customer LTV = Average Revenue Per Account (ARPA) / Customer Churn


Formula 2

Customer LTV = Average Revenue Per Account (ARPA) × Average Customer Lifetime


Before you get lost in repetitious words, 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 Lifetime Value 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.


Pricing Plans

Basic

Professional

Enterprise

$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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Using simple examples, we show you how to calculate each metric and why specific indicators are important to investors.


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