LTV, sometimes referred to as CLTV or CLV, refers to the total amount of revenue a customer is expected to generate for a company over the entire period of their relationship. It’s a prediction of the net profit attributed to the entire future relationship with a customer.
LTV is an important metric for SaaS companies because it informs decisions about customer acquisition and retention strategies, as well as pricing and marketing efforts. By understanding LTV, a company can invest in acquiring and retaining the most valuable customers and optimize their revenue growth over time.
There are multiple ways to calculate LTV. Our preferred methodology is dividing the Average Revenue per Account (ARPA) by the churn %.
LTV = Average Revenue per Account / Churn %
To determine ARPA, divide the total revenue by the number of customers, and to determine churn, divide the total number of customers lost by the total number of beginning customers. Note that if the ARPA in the equation is monthly, then the churn % should be monthly as well.