LTV — Lifetime value
LTV estimates how much revenue a customer brings across their whole relationship with the company. At a SaaS it is approximated by dividing average monthly revenue per customer by the monthly churn rate: the less people leave, the more each customer is worth.
What is lifetime value?
LTV estimates how much revenue a customer brings across their whole relationship with the company. At a SaaS it is approximated by dividing average monthly revenue per customer by the monthly churn rate: the less people leave, the more each customer is worth.
Also: LTV · CLV · customer lifetime value
Revenue is not profit
An LTV calculated on billings ignores what it costs to serve that customer. In a support-intensive product the difference is large, and two customers billing the same can be worth very different amounts. Calculating it on margin gives a smaller and more honest number.
Why it matters
What changes in a SaaS
It is half the equation that says whether the business works: what a customer is worth against what they cost to win. It also connects directly to support, because lowering churn raises LTV far faster than raising the price does.
Lifetime value in detail
The arithmetic, and its trap
At 2% monthly churn, LTV is fifty times the subscription. At 5%, twenty. It is extremely sensitive to churn, which is why an LTV calculated during a spell of exceptional retention becomes a figure nobody reaches again.
Segment it
The average LTV of a base with very different customers describes none of them. Per segment, it turns out one customer type is worth five times another, and that decides who to chase.
Questions about lifetime value
How is LTV calculated at a SaaS?
Roughly, average monthly revenue per customer divided by the monthly churn rate. Calculated on margin rather than billings it is more realistic, especially if support weighs heavily.
Is LTV useful at a young company?
With caution. Without twelve months of history the churn rate is too unstable, and the resulting number can vary by an order of magnitude month to month.
Related terms
A term on its own is only half understood. These come up in the same conversation.
CAC — Customer acquisition cost
CAC is what it costs to win a new customer: all marketing and sales spend in a period divided by the customers won in that same period. It includes salaries, tools and advertising, not only the ad budget.
Churn
Churn is the percentage of customers — or of revenue — lost in a period. It is the metric that decides whether a subscription business genuinely grows: with high churn, every new customer only fills the hole left by another.
NRR — Net revenue retention
Net revenue retention measures what a group of customers bills today against what they billed a year ago, counting what was lost to cancellations and contractions and what was gained from expansion by those same customers. It excludes new customers: it measures what the existing base does.
MRR — Monthly recurring revenue
MRR is the sum of recurring revenue a subscription business bills each month, normalising annual contracts to their monthly equivalent. It excludes anything that does not repeat — implementations, consulting, one-off charges — because its job is to measure the stable base.
ICP — Ideal customer profile
The ideal customer profile describes the kind of company the product works best for: its size, its sector, how it works and what problem it has. It is not who you sell to, it is who you should be selling to if you could choose.
Onboarding
Onboarding is the process that takes a customer from signing up to getting their first real result with the product. It covers the initial setup, the data import, training the team and everything else needed for usage to become routine.
