SaaS Customer Lifetime Value (LTV) Calculator
Calculate the projected revenue a single customer will generate throughout their lifespan with your SaaS business. This tool uses ARPU, Churn Rate, and Gross Margin to determine unit economics.
This figure represents the total gross profit expected from an average customer over their lifetime relationship with your company.
Understanding SaaS Customer Lifetime Value (LTV)
In the subscription economy, Customer Lifetime Value (LTV or CLV) is perhaps the most critical metric for understanding long-term business health. It measures the total amount of revenue a business can reasonably expect from a single customer account throughout their entire relationship with the company.
For SaaS businesses, calculating LTV accurately is essential because it dictates how much you can afford to spend to acquire a new customer (Customer Acquisition Cost, or CAC). A healthy SaaS business typically aims for an LTV to CAC ratio of 3:1 or higher.
The SaaS LTV Formula
While there are various ways to calculate LTV depending on business complexity, the standard formula for subscription businesses accounting for gross margin is:
LTV = (ARPU × Gross Margin %) / Customer Churn Rate
This formula projects the lifetime value based on current monthly performance metrics.
Input Definitions
Average Revenue Per User (ARPU)
This is the average amount of monthly revenue generated per account. If you have multiple pricing tiers (e.g., $29/mo, $99/mo, $299/mo), your ARPU is the weighted average across your entire customer base.
Monthly Customer Churn Rate
This is the percentage of customers who cancel their subscription within a given month. Churn is the primary enemy of LTV. Because it is in the denominator of the formula, even small improvements in retention (reducing churn) have an exponential impact on LTV.
Gross Margin
In SaaS, revenue isn't pure profit. You have Cost of Goods Sold (COGS), such as hosting costs (AWS/Azure), third-party API licensing fees, and customer support staffing. Gross Margin is the percentage of revenue remaining after these direct costs are subtracted. Typical SaaS gross margins range between 70% and 90%.
Example Calculation
Let's assume a B2B SaaS company has the following metrics:
- ARPU: $150 per month
- Monthly Churn Rate: 4% (0.04)
- Gross Margin: 85% (0.85)
Using the calculator above, the calculation would be:
(150 × 0.85) / 0.04 = 127.5 / 0.04 = $3,187.50
This means this specific company can expect to generate $3,187.50 in gross profit from each new customer acquired, helping them determine an appropriate marketing budget.