SaaS Lifetime Value Calculator

To calculate SaaS LTV, use the following steps:

1. Determine the average revenue per user (ARPA) by dividing the total monthly recurring revenue (MRR) by the total number of active users or accounts. The formula looks like this

ARPA = Total MRR / Total active users

2. Calculate the gross margin by subtracting the cost of revenue from net revenue. The formula looks like this  

Gross margin = Total revenue – Cost of revenue

3. Determine the customer churn rate by dividing the number of customers who cancel or stop using the service by the total number of customers at the start of the period. Then multiply that number by 100 to turn it into a decimal. 

Churn = (Lost customers / Total starting number of customers) x 100

4. Plug these values into the LTV formula and calculate. 

Let’s do an example customer lifetime value calculation together.

LeadBloom is a SaaS company that helps businesses automate their lead generation processes. Its total MRR is $186,380, which originates from 1,716 users. That brings their ARPA to $109. 

$68.62 ARPA = $186,380 MRR / 2,716 Total active users

LeadBloom’s total revenue is $216,110, and its cost of revenue is $51,270. Therefore, its gross margin is $164,840.

62% Gross margin = [($216,110 Total revenue –  $81,270 Cost of revenue) / $216,110 Total revenue] x 100

The company lost 208 customers. It started the month with 2,582. That means its monthly churn rate is 

8.1% Churn = (208 Lost customers / 2,582 Total starting number of customers) x 100

 We can now plug each value into the formula giving us a lifetime customer value of $525.24.

$525.24 LTV= ($68.62 ARPA x 62 Gross margin) / 8.1 Churn

SaaS LTV is important because it helps companies understand the value of acquiring and retaining customers and provides insights into their cash flow. Customer LTV informs customer retention and acquisition decisions, forecasts revenue and profits, identifies key customer segments, and compares different customer segments. By monitoring LTV, SaaS startups can make strategic decisions to maximize the value of their customer base over time.

But the LTV can’t tell you everything. Use it along with customer retention rates, customer acquisition costs, and revenue churn to get a more detailed view of a SaaS company’s financial health. 

A good LTV for SaaS is considered 3-5 times the customer acquisition cost (CAC). It means that for every dollar spent on acquiring a customer, the company expects to earn 3-5 dollars in revenue over the customer’s lifetime. However, different SaaS industries and business models have different LTV benchmarks. Factors like pricing, customer lifetime, and customer behavior can affect the LTV of a company.

Improving your SaaS LTV is all about increasing customer retention and lowering churn. Strategies to help you include

• Upselling and cross-selling to existing customers or increasing pricing to increase the average revenue generated per user.
• Review your customer acquisition strategy to improve CAC by refining your marketing and sales strategies. 
• Improve customer engagement by providing excellent customer support, creating valuable content, and engaging with customers.
• Optimize your pricing strategy to ensure you’re priced competitively but not leaving money on the table.
• Develop a customer loyalty program or create other incentives to encourage customers to stick around.
• Interview customers who have canceled their subscriptions to understand product weak points. 

Remember that SaaS LTV is not a one-time calculation. It should be continuously monitored and improved over time. By regularly analyzing your data and testing different strategies, you can improve your SaaS LTV, maximize the value of your customer base, and contribute to strategic growth.

SaaS LTV (Lifetime Value) and CAC (Customer Acquisition Cost) ratio are two key metrics used to measure the performance of a SaaS (Software as a Service) business. LTV predicts the net profit attributed to a customer’s future relationship, while CAC is the cost of acquiring a new customer. 

The LTV-to-CAC ratio compares the value of a customer to the cost of acquiring that customer and is used to determine the overall efficiency of a company’s sales and marketing efforts. A high LTV-to-CAC ratio indicates that the company is acquiring customers at a low cost and that they are highly valuable, while a low ratio suggests that the company is spending too much to acquire customers.