SaaS LTV Calculators: Four Formulas, Benchmarks

Looking at LTV gives you a better pulse on your business. It drives how much you can spend to acquire new customers.

In this article, you'll find:

• Formulas
• When to use these formulas
• Live interactive calculators for two formulas

How To Calculate Lifetime Value (LTV) for SaaS?

To calculate the LTV for a SaaS, there are four different formulas.

• All formulas we've mentioned are valid ways to calculate LTV but they're used in slightly different contexts and can yield different results.
• The choice often depends on the company's growth stage, business model, and specific analytics needs.
• In practice, many companies choose the first or the second method.

1. Using Churn Rate

LTV = Average Revenue Per User / Churn Rate

where,

• ARPU = Revenue at End of Year / Users at End of Year
• Churn Rate = Customers Lost During the Year / Customers at the Start of the Year. Alternatively, use Churnkey Churn Metrics or this free churn calculator to calculate.

2. Using Revenue Churn Rate and Gross Margin

LTV = Average Revenue Per User * Gross Margin / Revenue Churn Rate

where,

• ARPU = Revenue at End of Year / Users at End of Year
• Gross Margin = Total Revenue – Cost of Goods
• Revenue Churn Rate = (Revenue Lost from Churned Customers - Revenue Gained from Expansions from Existing Customers) / Revenue Lost from Churned Customers. Alternatively, use Churnkey's free Churn Metrics to calculate.

3. Using Customer Lifetime

Revenue Churn Rate = Customer Lifetime in Months / Average Revenue per Customer

where,

• Customer Lifetime in Months = 1 / Customer Churn Rate
• ARPU = Revenue at End of Year / Users at End of Year

4. Using Your Billing Dashboards

Stripe and all other billing providers share LTV in their dashboards. The only caveat is that for new accounts when data is not known, it assumes a churn rate of 1.67% (or 18.3% annual churn).

If you don't see LTV yet, turn it on from the settings.

A higher churn directly lowers LTV. A 5% monthly churn equals to losing roughly 45% of all customers in that year. Even a small decrease in your monthly churn rate can significantly boost LTV.

Churn is made up of two parts: involuntary and voluntary churn. You could lose more of customers (#) or revenue ($). The best way to reduce churn is to have an incredible cancel flow with trial extensions, pause walls, discounts personalized to each user. This helps with voluntary churn. You can then reduce involuntary churn with precision retries, dunning email campaigns, and reactivations.

Improve SaaS LTV With Churnkey

Churnkey offers support for both voluntary and involuntary churn prevention as well as deep analytics so you can understand the root causes of your customer churn. The free Churn Metrics product can help understand your retention metrics.

On average, our customers retain 20-40% of the revenue that they would have otherwise lost to churn.

Additional Reading

• How to improve renewal rate?
• Hard and soft declines
• Customer exit survey
• Retention rate and revenue rate calculator
• Gross churn vs net churn
• Customer retention curves

FAQs

SaaS LTV formula

The LTV formula can be calculated in four ways. One way is ARPU / Churn Rate.

How to calculate Customer Lifetime Valule?

To calculate LTV, you need to calculate customer churn and ARPU. Annual Customer Churn = (Number of Churned Users / Average Number of Users) * 100. ARPU = Revenue from Customers / Total Customers

What is a good annual churn rate?

These metrics were originally sourced by Lenny's monthly churn post. We've converted them to annual rates.

• For B2C SaaS: Between 31% and 46% annual churn is GOOD, and less than 22% is GREAT. These include subscription products sold to consumers; e.g. Duolingo, Spotify, Grammarly.
• For B2B SMB + Mid-Market: Between 26% and 46% is GOOD, and less than 17% is GREAT. These include products sold to companies with less than 1,000 employees and charge less than $1K per month for the average customer. Examples: Gusto, Intercom, Airtable, Asana
• For B2B Enterprise: Between 11% and 22% is GOOD, and less than 6% is GREAT. These products are sold to companies with more than 1,000 employees, generally charging more than $5K per month for the average customer; e.g. Salesforce, Snowflake, Workday, ADP

What is a good LTV benchmark?

LTVs vary from industry to industry and the market segment you serve. However, a general LTV to CAC ratio is 3:1. Most companies prefer to look at payback periods as a way to benchmark the LTV. Payback period shows you soon can you recoup the CAC.