What is SaaS Customer Lifetime Value (LTV)?
SaaS Customer Lifetime Value (LTV) shows how much money a customer brings to a business before they stop using the service. This metric helps SaaS companies understand how valuable each customer is. It also helps businesses decide how much to spend on getting new customers.
A higher LTV means customers stay longer and spend more. A lower LTV means customers leave quickly, and the business makes less money from each customer.
Several factors affect LTV:
- Monthly Recurring Revenue (MRR) – The money earned from customers every month.
- Churn Rate – The percentage of customers who stop using the service.
- Customer Acquisition Cost (CAC) – The cost of getting a new customer.
LTV is important because it helps SaaS companies make better decisions about pricing, marketing, and customer retention.
SaaS Lifetime Value Calculator – How It Works
Our SaaS customer Lifetime Value Calculator helps you calculate the lifetime value of your customers , and determine how much you can afford to spend on acquisition. This is important to control expenditures, attain profitability and make better decisions.
This calculator helps businesses find LTV in seconds. Enter these values:
- Monthly Recurring Revenue (MRR) – How much money the business makes each month.
- Number of Customers – The total number of paying users.
- Monthly Churn Rate (%) – The percentage of users leaving per month.
- Customer Acquisition Cost (CAC) – The cost of getting one customer.
Click calculate, and the tool will show the LTV.
How to Calculate Customer Lifetime Value for SaaS
There are multiple ways to calculate Customer Lifetime Value for SaaS, each with a different approach depending on the available data and business model. Each formula provides a different level of accuracy and insight.
5 of the most used SaaS LTV calculation formulas are:
1. Basic LTV Formula
This is the simplest way to calculate LTV:
Explanation:
- ARPU is the revenue a single customer generates per month.
- Churn Rate is the percentage of customers lost each month.
- This formula assumes customers leave at a steady rate.
Example:
If a company has an ARPU of $50 and a churn rate of 5%, then:
LTV=50/.05=1000
So, the expected lifetime value of each customer is $1,000.
2. Profit-Based LTV Formula
Some companies prefer using profit-based lifetime value calculation for SaaS instead of revenue-based:
Explanation:
- Gross Margin is the percentage of revenue left after deducting costs (e.g., hosting, support).
- This formula gives a more accurate LTV by considering profits instead of revenue.
Example:
If ARPU is $50, Gross Margin is 80%, and Churn Rate is 5%:
LTV=(50×0.8)/0.05=800
So, the profit-based LTV is $800 per customer.
3. Cohort-Based LTV Calculation
This method tracks customers in groups (cohorts) over time. Instead of assuming a fixed churn rate, it uses real data.
Explanation:
- Revenue from Cohort = Total revenue from a specific group of customers.
- t = Time period (months or years).
- d = Discount rate (to adjust future revenue to present value).
- This method is more accurate but needs a lot of data.
Example:
If a cohort generates $1,000 in year 1, $700 in year 2, and $400 in year 3, with a discount rate of 10%, the LTV is:
LTV=1000(1.1)1+700/(1.1)2+400(1.1)3
This gives a more precise estimate based on actual revenue trends.
4. LTV with Customer Retention Rate
This method considers how long customers stay instead of churn rate.
Explanation:
- Retention Rate is the percentage of customers who stay each month.
- It works better for SaaS businesses with high retention and low churn.
Example:
If ARPU is $50 and Retention Rate is 90%:
LTV=50×0.9/1−0.9 =450
So, each customer is expected to generate $450 over their lifetime.
5. LTV Using the Discounted Cash Flow (DCF) Method
This advanced method accounts for the time value of money (future revenue is worth less than today’s).
Explanation:
- r = Discount rate (adjusts future revenue to present value).
- Useful for companies with long customer lifecycles.
- More realistic but complex to calculate.
Alternatively, Use our SaaS Lifetime Value Calculator, a simple yet accurate tool for calculating customer lifetime value for saas and make better business decisions.
SaaS LTV to CAC Ratio – Why It Matters
The LTV to CAC ratio is one of the most important SaaS business metrics. It tells you whether your business is profitable in the long run.
- LTV (Lifetime Value) shows how much revenue a customer brings before they leave.
- CAC (Customer Acquisition Cost) shows how much money is spent to get a new customer.
The formula to calculate the ratio is:
LTV÷CAC
What Does the LTV to CAC Ratio Mean?
This ratio helps businesses decide if they are spending too much or too little on acquiring customers.
Ideal LTV to CAC Ratio
A good benchmark is 3:1 or higher.
- If the ratio is 3:1 → The business earns three times more from a customer than it spends to get them. This is healthy and sustainable.
- If the ratio is lower than 3:1 → The business is spending too much to acquire customers. This can lead to losses.
- If the ratio is much higher than 3:1 → The business might not be spending enough on marketing. This means there is an opportunity to invest more in acquiring customers and growing the business faster.
Example Calculation
Let’s say a SaaS company calculates the following:
- LTV = $1,500
- CAC = $500
LTV÷CAC=1,500÷500=3
This means the business makes three times more money from a customer than it spends to acquire them. This is a healthy ratio.
Why is the LTV to CAC Ratio Important?
- Helps in Budgeting for Marketing & Sales
- If CAC is too high, the business might be spending too much on ads or sales teams.
- A healthy ratio helps plan marketing budgets wisely.
- Shows Business Sustainability
- If LTV is lower than CAC, the business loses money.
- A good ratio means the company is profitable and can grow over time.
- Guides Decision-Making for Growth
- If the ratio is too high, the business can spend more on marketing to attract customers faster.
- If the ratio is too low, it needs to improve customer retention or reduce CAC.
How to Increase SaaS LTV After Calculation
Once you calculate LTV, the next step is to increase it. A higher LTV means customers stay longer and spend more.
1. Reduce Customer Churn
Churn is the number of customers leaving the service. If customers leave quickly, LTV will be low.
How to reduce churn:
- Improve Onboarding → Make sure new users understand how to use the product. Provide tutorials, guides, and support.
- Offer Better Customer Support → Quick responses and helpful support can keep customers happy.
- Fix Pain Points → Find out why customers are leaving and solve those issues.
Example: A SaaS company notices that most customers leave after two months. They introduce an onboarding program with video tutorials. Churn decreases, and LTV increases.
2. Increase Average Revenue Per User (ARPU)
Higher revenue per user means a higher LTV.
Ways to increase ARPU:
- Upsell Premium Features → Offer advanced features for an extra fee.
- Add Additional Services → Sell add-ons that complement the main product.
- Encourage Annual Plans → Customers who pay yearly instead of monthly tend to stay longer.
Example: A SaaS business charges $20 per month. They introduce a premium plan at $40 per month with extra features. Many users upgrade, increasing LTV.
3. Keep Customers Engaged
If customers regularly use the product, they are less likely to leave.
How to increase engagement:
- Send Helpful Emails → Regular updates, tips, and best practices keep users active.
- Offer Loyalty Rewards → Discounts or bonuses for long-term users keep them subscribed.
- Create a Community → A forum or support group helps users connect and stay engaged.
Example: A SaaS company adds a customer forum where users can ask questions and share experiences. Engagement increases, and churn decreases.
4. Improve Product Value
If customers see value in the product, they will stay longer and spend more.
Ways to improve value:
- Regularly Update Features → Keep improving the product based on customer feedback.
- Fix Bugs Quickly → A smooth user experience increases satisfaction.
- Offer Personalized Support → Understand customer needs and offer solutions.
Example: A SaaS company gets feedback that users struggle with a feature. They release an update that makes it easier to use. More users stay, and LTV increases.
Final Thoughts
Increasing LTV takes time, but it helps grow a SaaS business. The key areas to focus on are:
Reducing churn – Keep customers longer.
Increasing ARPU – Get customers to spend more.
Improving engagement – Keep users active.
Enhancing product value – Make sure the product meets customer needs.
By improving these factors, SaaS businesses can maximize customer lifetime value and increase profits.
