Enter the revenue per account, gross margin, and churn % into the calculator below to determine the value of your software as a service.

SaaS Formula

The following formula is used to calculate the lifetime value of software as a service.

LV= [0.5 * 1 / churn(%) * (2 * RPA + RPA_growth * (1 / churn(%) – 1))] * GM

  • Where LV is the lifetime value
  • churn(%) is the percentage of customers that cancel each month
  • RPA is the revenue per account
  • GM is the gross margin (%)

SaaS Lifetime Value Definition

SaaS Lifetime Value (LTV) is a crucial metric that measures the total revenue a software-as-a-service (SaaS) company can expect to generate from a single customer throughout its entire relationship with the company.

It is determined by calculating the average revenue earned per customer per month and multiplying it by the average customer lifespan.

LTV is significant as it provides valuable insights into the overall health and profitability of a SaaS business.

By understanding the potential value each customer can bring, companies can make informed decisions regarding customer acquisition costs, marketing strategies, and customer retention efforts.

LTV helps companies assess the viability of their business model. If the LTV of a customer exceeds the cost of acquiring that customer, it indicates a sustainable and profitable business model.

On the other hand, if the LTV is lower than the customer acquisition cost, it raises concerns about the company’s long-term profitability and necessitates adjustments to pricing, marketing, or customer retention strategies.

LTV helps SaaS companies evaluate their performance against industry benchmarks and competitors. Comparing LTV with industry averages provides insights into the company’s market positioning and competitiveness.

It enables the identification of areas where improvements are needed to ensure sustainable growth and profitability.

How to calculate SaaS lifetime value?

How to calculate the lifetime value of a SaaS?

  1. First, determine the churn rate.

    The churn rate is the percentage of customers that cancel their agreement each month.

  2. Next determine the revenue per account.

    This is the total revenue expected over the lifetime of a single account.

  3. Next, determine the gross margin.

    The gross margin is the measure of % profit after expenses are taken into account.

  4. Finally, calculate the lifetime value.

    Calculate the lifetime value using the equation above.

FAQ

How do i increase the lifetime value of my service?

The answer to this question is displayed nicely in the equation above. To increase the lifetime value, you must do at least one of the following; decrease the churn%, increase the RPA, or increase the margin.

How can i increase RPA of my service?

The RPA of service can be increased by simply increase the price of the service, however, this doesn’t often go over well with the customer and leads to a higher churn (%). Instead, it’s best to offer a new feature along with this price increase.

How do i reduce churn %?

Two words: Customer Service. Provide excellent customer service and you will retain clients no matter how bad your software as a service actually is. People want to feel like they are cared for.

SaaS Lifetime Value Calculator