What is LTV?

Customer Lifetime Value (LTV) represents the average revenue that a customer generates before they churn, offset by gross margin. LTV in SaaS is only ever used as a forward-looking estimate of the future, but calculating a reasonable estimate allows you to make smarter decisions for your business.

How is LTV useful?

Balancing customer acquisition spend

If I know my LTV is ‘X’, I can confidently spend ‘Y’ to acquire customers without much risk.
Determining payback period

How long does it take for a customer to “pay back” their acquisition cost? The longer this is, the more risk there is tied up in the business.
Investor reports

Many investors in SaaS want to see LTV as a part of their “health” assessment of a prospective investment.

LTV Calculator

Try it yourself

SaaS Lifetime Value Calculator

The basic LTV formula

ARPA: Average Revenue Per Account (The average MRR across all of your active customers)

Gross Margin: The difference between revenue and COGS (Cost Of Goods Sold). This is typically extremely high in SaaS (>80%)

Customer Churn Rate: The rate at which your customers are cancelling their subscriptions.

This basic LTV formula is commonly accepted as a useful starting point. However, it’s only a rough estimate and doesn’t properly account for MRR expansion, contraction or non-linear churn.

The “David Skok” formula Advanced mode

G is an annual growth rate for customers who haven’t churned

K = (1 - Customer Churn Rate) x (1 - Discount Rate)

Discount Rate is a pre-defined annual rate of your choosing, accommodating risk and reduced value of future money. Skok suggests a value of 20-25% for pre-scale businesses. The calculator above uses a fixed discount rate of 20%.

SaaS VC and thought leader David Skok recently introduced a more advanced LTV formula, which produces a more ‘realistic’ estimate of the metric. The formula incorporates: