The Comprehensive Guide to SaaS LTV: How to Calculate and Optimize Lifetime Value
TL;DR
Stop guessing your marketing budget. Learn the exact formula for SaaS Lifetime Value (LTV), understand the "Golden Ratio" of LTV:CAC, and discover actionable strategies to reduce churn.
Table of Contents
If there is one metric that determines the fate of a SaaS startup, it is Lifetime Value (LTV). It tells you exactly how much revenue a single customer will generate before they leave.
But here is the problem: Most founders calculate it wrong. They ignore gross margins, they confuse annual vs. monthly churn, or they simply rely on "vanity metrics" that look good in a pitch deck but hide the burning cash underneath.
In this guide, we will strip away the jargon and give you the definitive playbook on SaaS unit economics. We will cover the math, the benchmarks, and how to use our Free LTV Calculator to make smarter ad spend decisions.
What is LTV (and Why Should You Care?)
Lifetime Value is the total gross profit you expect to make from a customer over their entire relationship with your company.
The Correct Formula
Don't use complex predictive AI models just yet. The standard formula for subscription businesses is:
LTV = (ARPU × Margin %) / Churn Rate
- 1
ARPU (Average Revenue Per User)
The average amount a customer pays you per month.
- 2
Gross Margin %
Crucial step! This is revenue minus COGS (Server costs, APIs, Support). If you omit this, you are calculating Revenue-LTV, not Profit-LTV, which is dangerous.
- 3
Churn Rate %
The percentage of customers who cancel in a given period (usually monthly). Always use monthly churn for this formula.
The Golden Ratio: LTV:CAC
Once you have your LTV, you compare it to your Customer Acquisition Cost (CAC). This ratio defines your business health.
1:1 Ratio
Danger Zone. You are spending $100 to make $100. After operating costs, you are bleeding money.
3:1 Ratio
Healthy. The industry standard. You make 3x what you spend. This creates sustainable growth.
5:1+ Ratio
Cash Cow. You are highly profitable, but you might be growing too slowly. Spend more on marketing!
What is a "Good" Churn Rate?
Churn is the silent killer of SaaS. Here is what to aim for based on your customer type:
- B2C (Spotify, Netflix): 3-5% Monthly churn.
- B2B SMB (Mailchimp): 1.5-3% Monthly churn.
- B2B Enterprise (Salesforce): <1% Monthly churn.
3 Ways to Boost LTV
Want to increase LTV? You have three levers:
- Raise Prices (Increases ARPU): The easiest lever. Even a 10% price hike flows directly to LTV.
- Upsell Features (Increases ARPU): Add higher tiers for power users.
- Fix Onboarding (Reduces Churn): Most churn happens in the first 30 days. Make sure users find value immediately.
Start Calculating Today
Unit economics can verify if your business idea is a rocket ship or a leaky bucket. Don't fly blind.
Was this article helpful?
Comments
Loading comments...