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How to calculate the Lifetime Value (LTV) of a Customer

Calculating LTV requires a combination of ARPU, CCR and ACL; find out what that means below.

LTV, or Lifetime Value, measures the total revenue a customer will generate for a business over their lifetime. It is a key metric for SaaS (Software as a Service) companies, as it helps them understand the potential value of each customer and make informed decisions about acquisition and retention efforts.


To calculate LTV for a SaaS company, you will need to know the following:

  1. Average revenue per user (ARPU): This is the average amount of money that each customer pays per month.

  2. Customer churn rate: This is the percentage of customers cancelling their monthly subscriptions.

  3. Average customer lifespan: This is the average length of time a customer remains a paying subscriber.

Once you have these numbers, you can use the following formula to calculate LTV:

 

LTV = ARPU / churn rate

LTV calculation example

For a SaaS company with an ARPU of $100 and a monthly churn rate of 5%, LTV is calculated as follows:

LTV = $100 / 0.05 = $2,000

On average, each customer generates $2,000 in revenue for the company over their lifetime.

 

For further guidance on related SaaS metrics such as Customer Acquisition Cost (CAC) and churn analysis, refer to the related articles in this knowledge base.