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.

Try it yourself

SaaS Lifetime Value

The basic LTV formula

LTV Formula - Basic

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

LTV Formula - Skok

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:

  • Revenue expansion from customers upgrading plans
  • Risk (resulting in a more pessimistic value)
  • The reduced value of money over time
David Skok: What’s your TRUE customer lifetime value (LTV)? – DCF provides the answer

Now see your LTV in real time, with ChartMogul.