The North Star of Unit Economics
Customer Lifetime Value (LTV) is arguably the most important metric in a subscription business. It answers the fundamental question: "How much is a customer worth?"
Without knowing your LTV, you cannot know how much you can afford to spend on marketing. If your LTV is $500, spending $600 to acquire a customer (CAC) puts you on the fast track to bankruptcy. Using this SaaS LTV Calculator helps you find your safe spending limits.
Growth Ceiling
Your LTV dictates your maximum ad bids. A higher LTV allows you to outbid competitors for premium traffic.
Churn Sensitivity
LTV is incredibly sensitive to retention. Reducing churn from 5% to 2.5% automatically doubles your customer value.
Investor Metrics
Investors look for a 3:1 LTV:CAC ratio. This signals that your growth engine is efficient and scalable.
The Golden Formula
While there are complex ways to calculate LTV using discount rates and expansion revenue, the standard operational formula for SaaS is:
Component Breakdown:
- ARPA (Average Revenue Per Account): The average monthly recurring revenue (MRR) across all active customers.
- Gross Margin: The profit margin after server costs and support. Usually 80% for pure software.
- Churn Rate: The percentage of customers who cancel their subscription in a given period.
How to Improve LTV
Since LTV is a function of three variables, you have three levers to pull:
- Raise Prices (Increase ARPA): The fastest way to increase LTV. Grandfathering old pricing can minimize churn risk.
- Cross-Sell / Up-Sell (Increase Expansion): Getting customers to upgrade to a higher tier increases their value without needing new acquisition.
- Fix Integration (Reduce Churn): Most churn happens in the first 90 days. Improving onboarding is the highest ROI activity for LTV.