What is SaaS lifetime value (LTV)?

What is SaaS Lifetime Value (LTV)? SaaS Lifetime Value (LTV) is a metric that estimates the total revenue a business can expect from a single customer over the entire duration of their relationship. It helps companies understand the long-term value of acquiring and retaining customers, which is critical for making informed decisions about sales, marketing, and product development. Unlike one-time sales, SaaS businesses rely on recurring revenue, so LTV reflects how much a customer contributes over months or years, not just a single transaction.

How is LTV Calculated? The basic formula for LTV is: LTV = (Average Revenue Per User per Month, or ARPU) × (Average Customer Lifespan in Months). For example, if a customer pays $50/month and stays for 24 months on average, their LTV is $1,200. However, this can be refined by incorporating gross margin (revenue minus service costs) and churn rate (percentage of customers who cancel). A more detailed formula might use LTV = (ARPU × Gross Margin) / Churn Rate, which accounts for profitability and retention. Developers working on subscription systems might track metrics like churn or billing cycles to feed into these calculations.

Why Does LTV Matter? LTV directly impacts business strategy. For instance, if a SaaS company’s LTV is $1,200, they can justify spending up to $400 to acquire a customer (assuming a 3:1 LTV-to-CAC ratio, a common benchmark). A developer building a feature to reduce churn (e.g., improving onboarding) could directly increase LTV by extending customer lifespan. Similarly, optimizing pricing tiers or upsell opportunities (e.g., offering premium add-ons) can raise ARPU. By quantifying customer value, teams prioritize efforts that align with sustainable growth, ensuring resources are spent on high-impact areas.