SaaS LTV Calculator
Empower your strategic decisions using our intuitive LTV Calculator. Gain insights into your customers' lifetime value and drive your SaaS business towards sustainable growth.
Keen to increase your LTV? Upollo can help.
What is LTV (Lifetime Value) for SaaS?
Lifetime Value (LTV) for SaaS is a critical metric that estimates the total revenue a business can expect from a single customer account throughout their relationship with the service. Knowing your LTV helps businesses understand customer value over time, guiding key decisions in marketing, sales, and product development. By calculating LTV, SaaS companies can allocate resources more effectively and tailor strategies to maximize customer retention and value.
How to Calculate LTV
We use two simple formulas to calculate LTV.
To find the LTV of a company that bills monthly:
LTV = (MRR x Gross Margin) / Monthly Churn Rate
To find the LTV of a company that bills annually:
LTV = (ACV x Gross Margin) / Annual Churn Rate
An Example Scenario:
Let’s say you want to calculate LTV for your B2B SaaS company and you have the following metrics:
- Monthly subscription billing
- 5,000 paying customers bringing in $250,000 gross monthly revenue
- Average MRR (Monthly Recurring Revenue): $50 per customer
- Gross margin: 95% (expressed as a decimal, 0.95)
- Monthly Churn Rate: 4% (expressed as a decimal, 0.04)
If you don't know the above metrics for your company, let's take it step-by-step:
- Calculate your MRR: Since this company bills monthly, we'll use MRR as our revenue metric. If your company bills annually, you could use ARR or ACV. Divide your total revenue (250,000) by the number of paying customers or users (5,000) to give you a MRR (monthly recurring revenue) of $50 per customer.
- Calculate gross margin: Gross margin can be calculated by adding up all expenses for your business, including hosting & server costs, employee salaries, and office space. Divide your total costs by your total revenue, to give you a percentage known as gross margin. For a healthy company, your gross margin should be above 80%, but most companies find their gross margin to be anywhere between 75–95%. A gross margin of 100% means you have absolutely no expenses and you retain all of the revenue earned from your business. In this example, if you made $250,000 in revenue but had $12,500 (5% of $250,000) in costs & expenses, you would calculate your gross margin at 95%.
- Calculate your churn rate: Churn rate calculates how many customers remain each month. Count all of your customers on the first day of the month. At the end of the month, add up how many customers remain. Divide the remaining customers by the customers by the number of customers from the start of the month. The resulting percentage is your churn rate. A typical churn rate could be anywhere from 1–50%, with many companies reporting an average churn rate of 4-6%, depending on the time frame. In this example, we'll use a typical churn rate of 4%.
- Calculate LTV: Next, put everything together. Replace the values we figured out above into the formula for LTV: LTV = (MRR - Gross Margin) / Monthly Churn Rate. With the values replaced, it would look like this: LTV = (50 * 95%) / 0.04. In this example, your LTV is $1,187.50, meaning you can expect a typical customer to spend this much with your company over time.
Since the monthly revenue per customer is $50, we can estimate that a typical customer might stay with you for about 23.75 months before churning. There are many ways to increase your LTV, which are outlined below. For those looking to reduce their churn rates, read our guide on churn.
Other Methods of Calculating LTV
There are a few different methods of calculating LTV for different business models and industries.
Historical LTV by Customer Lifetime
LTV = Revenue x Customer Lifespan
Method: You must first figure out an average time period for your customers' lifespan. For example, let's assume most of your customers churn after 6 months, after spending $50 per month. Multiply the number of months by the average revenue earned from each customer to calculate a historical LTV based on customer lifetime.
Use Case: Good for businesses with a long customer history and consistent behavior.
Cohort LTV Analysis
Method: Group customers based on their acquisition period and track their revenue contribution over time.
Use Case: Good for companies with seasonal variations in business, constantly changing product offerings, or many different segments of users.
Predictive LTV Calculation
Use Case: Best for companies with a large customer base and rich data sets.
Why is LTV Important?
LTV is crucial for businesses, especially SaaS and subscription-based models, because it helps quantify the long-term value of customers. Understanding LTV allows companies to determine how much they can afford to spend on acquiring new customers (See also: CAC) and highlights the importance of retaining existing ones. LTV also assists in identifying high-value customers and optimizing marketing strategies to maximize profitability.
How to Grow your LTV
Growing your LTV is a pivotal strategy for long-term success. Here's where you can start:
Increase Revenue Per User: Focus on upselling and cross-selling opportunities. By introducing tiered pricing models, you can encourage users to upgrade to higher-value plans. Implement features or services that add real value to the user experience, making the premium plans more attractive.
Expand Your Existing User Base: Invest in marketing strategies that target your ideal customer profile more effectively. Use data-driven insights to refine your targeting and personalize your marketing messages, increasing conversion rates from free to paid users. Consider identifying and nurturing champions.
Improve Margins: Streamline your operations and reduce costs. Consider automation for repetitive tasks, renegotiate contracts with vendors, and focus on scalable cloud services to manage operational costs more efficiently.
Decrease Churn: Implementing a robust customer success strategy can significantly reduce churn. Offer excellent customer service, regular check-ins, and personalized onboarding sessions. Utilize feedback loops to constantly improve the product based on user suggestions and complaints. We've written a guide on churn for more tips on reducing your churn rate.
Frequently Asked Questions: Lifetime Value (LTV)
LTV and CLTV are often used interchangeably. LTV (Lifetime value) refers to However, CLTV specifically refers to the value of a customer over their entire relationship with a company, including potential upsells and cross-sells, making it a broader concept.
Average Revenue Per Account (ARPA), (often used interchangeably with ARPU, Average Revenue Per User) is a measure of the average monthly or annual revenue generated by each customer account.
Gross Margin in SaaS is the percentage of revenue that remains after subtracting the cost of goods sold (COGS), which includes costs directly related to service delivery. It's crucial for understanding the actual profit generated per customer. The formula for gross margin:
Gross Margin = ((Total Revenue - Total Costs) / Total Revenue) x 100
LTV is vital as it helps in understanding customer value and informs strategies to enhance customer experience, optimize pricing models, and improve retention rates. A high LTV indicates a healthy, sustainable business model.