Enter the revenue per account, gross margin, and churn % into the calculator below to determine the value of your software as a service.
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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 (%)
SasS is an acronym that stands for software as a service. In short, it is any software that is sold to consumers as a service.
How to calculate SaaS lifetime value?
How to calculate the lifetime value of a SaaS?
- First, determine the churn rate.
The churn rate is the percentage of customers that cancel their agreement each month.
- Next determine the revenue per account.
This is the total revenue expected over the lifetime of a single account.
- Next, determine the gross margin.
The gross margin is the measure of % profit after expenses are taken into account.
- Finally, calculate the lifetime value.
Calculate the lifetime value using the equation above.
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.
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.
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.