Calculating LTV for SaaS: Strategies for Growth

We've been doing this SaaS marketing thing for over a decade now. Managing north of $30M in ad spend for companies like Mixpanel and ShipBob. And you know what metric keeps popping up in literally every strategy call?

Customer lifetime value SaaS.

Most founders and marketers we talk to either overcomplicate SaaS LTV or treat it way too casually. They're either building elaborate spreadsheets that would make a data scientist weep, or they're using some formula they grabbed from a blog post written when Obama was still president.

We're going to walk through exactly how to calculate LTV for SaaS, the mistakes we've seen hundreds of times, and what to actually do with this number once you have it.

What Is Customer Lifetime Value in SaaS?

The LTV SaaS definition is straightforward: it's the total revenue you can expect from a single customer throughout their entire relationship with your company. How much is each customer actually worth to us?

In SaaS, this gets interesting because you're not dealing with one-time purchases. You've got recurring revenue, SaaS churn rate, expansion MRR, annual contracts, usage-based pricing. A customer who signs up today might stick around for six months or six years. That difference matters when you're deciding how much to spend acquiring them.

LTV vs. CLV

What is the difference between LTV and CLTV? Real talk, there isn't one. People use LTV (Lifetime Value) and CLV (Customer Lifetime Value) interchangeably. Some companies prefer one term over the other, usually based on whatever their previous marketing team called it. It's kind of like how some people say "soda" and others say "pop", regional preference, nothing more.

Don't stress about which acronym you use. We use LTV because that's what most SaaS companies call it.

Key Metrics You Need Before Calculating LTV

Before you can tackle SaaS lifetime value calculation, you need these numbers nailed down. Not estimated. Actually tracked and measured.

Something we tell clients all the time: marketing rarely fails because of low traffic. The real leak is often deeper in the funnel. LTV is part of a broader ecosystem of B2B SaaS marketing metrics that work together to tell your growth story.

ARPA (Average Revenue Per Account), take your total monthly recurring revenue and divide it by the number of customers. But if you have different pricing tiers (and you probably do), track ARPA by segment too. We've seen companies where enterprise customers have an ARPA 10x higher than their SMB segment. Treating them as one cohort completely throws off the calculations.

Gross margin SaaS is your revenue minus the direct costs of delivering your service. For SaaS, this typically includes hosting costs and customer support. Most healthy SaaS companies operate at 70-85% gross margins. If yours is sitting at 40%? That's a conversation worth having before you start pouring money into paid acquisition.

SaaS churn rate is where things get uncomfortable. Your monthly churn rate is the percentage of customers who cancel each month. Companies often track logo churn when they should be tracking revenue churn. If your biggest customer churns, that's not the same as losing a $29/month account. Track both separately. According to HubSpot's research, a healthy churn rate for SaaS companies is between 2% and 8%, though this varies significantly based on your business model and customer segment.

Customer Lifetime is basically the inverse of your churn rate. Lose 5% of customers per month? Your average customer lifetime is about 20 months.

You might also want to track expansion MRR and net revenue retention (NRR) if you have upsells or usage-based pricing. Some of our best-performing clients get 20-30% of their revenue from existing customer expansion. For a deeper look at these and other SaaS metrics LTV depends on, check out our guide to 15 advanced SaaS marketing metrics.

LTV Formulas for SaaS (From Simple to Advanced)

There's no one-size-fits-all SaaS LTV formula. Use the one that matches your business model and data quality. Amplitude's guide to SaaS LTV breaks down different calculation methods depending on your data maturity and business stage.

Here's how the formulas stack up based on your business stage and data sophistication:

The Basic Formula

LTV = ARPA × Customer Lifetime

Average customer pays you $100/month and sticks around for 20 months? Your LTV is $2,000. This works fine if you're early stage.

The Slightly Better Formula

LTV = ARPA × Gross Margin % × Customer Lifetime

This factors in your costs. Operating at 80% margins? That $2,000 LTV becomes $1,600 in actual value.

The Growth-Adjusted Formula

LTV = (ARPA × Gross Margin %) / (Monthly Churn Rate - Monthly Account Expansion Rate)

This accounts for customers actually paying you more over time through upsells and additional seats. This is the formula we use most often with our clients because it better reflects real SaaS economics.

The Cohort-Based LTV Approach

Instead of using averages, you track actual cohorts of customers over time and calculate their real revenue contribution. Most accurate but also most data-intensive. You need at least 12-18 months of data to do this well.

Just starting out? Stick with the basic formula. Once you have more history, move to the growth-adjusted one. We've seen companies waste weeks building elaborate models when they should have been focused on reducing churn.

Step-by-Step: How to Calculate LTV for Your SaaS

Let's walk through an LTV SaaS example with real numbers. We'll use a fictional company we'll call "DataFlow", a mid-sized analytics platform.

Customer Lifetime Value Calculation Example

DataFlow has:

• Monthly Recurring Revenue: $250,000
• Number of Active Customers: 500
• Monthly Churn Rate: 4%
• Gross Margin: 75%
• Average Monthly Expansion Revenue per Customer: $10

Calculate ARPA

ARPA = $250,000 / 500 customers = $500 per month

Calculate Monthly Churn and Growth

Monthly Churn Rate: 4% Monthly Account Expansion: $10 / $500 = 2%

Apply the LTV Calculation SaaS Formula

LTV = ($500 × 75%) / (4% - 2%) LTV = $375 / 2% LTV = $18,750

Each customer is worth $18,750 over their lifetime.

Calculate LTV:CAC Ratio

If DataFlow's Customer Acquisition Cost (CAC) is $5,000: $18,750 / $5,000 = 3.75

Most VCs want to see 3:1 or better. With this ratio, DataFlow could spend up to $6,250 per customer and still hit good unit economics. This also affects their CAC payback period, how long it takes to recover acquisition costs. Wall Street Prep's analysis provides detailed benchmarks showing that SaaS companies should target LTV:CAC ratios between 3:1 and 5:1 for sustainable growth.

When we work with clients on paid search campaigns or LinkedIn advertising, the LTV vs CAC SaaS ratio is the first thing we look at. When developing your SaaS KPIs, this ratio should be at the foundation of your decision-making.

Common Mistakes When Calculating SaaS LTV

We've audited probably a hundred SaaS companies at this point. These mistakes keep showing up.

Here's your LTV calculation health check. If you're making any of these mistakes, your numbers are probably off by 30% or more:

Ignoring Cohort Behavior, your January 2023 customers probably behave different than your September 2024 customers. Maybe you changed pricing or improved onboarding. Using one average across all time periods can skew your numbers.

Not Factoring in Discounts, running promotions or giving annual plan discounts? Your actual ARPA is lower than your list price. Use the real revenue.

Forgeting About Payment Failures, credit cards expire. Payments fail.If 5% of your "active" customers aren't actually paying each month, that impacts your real LTV.

Using Revenue Churn Instead of Customer Churn, these measure different things. Revenue churn accounts for expansion and contraction. Customer churn is logo loss. We've seen this tank entire acquisition strategies.

Not Segmenting by Customer Type, your enterprise customers and SMB customers have wildly different LTVs. Treating them the same leads to either overspending on SMB acquisition or underspending on enterprise.

Calculating LTV Too Early, launched six months ago? You don't really know your LTV yet.Be conservative until you have at least 12 months of real churn data.

We see companies calculate LTV once and then never update it. Your LTV should change as your business matures. Recalculate this quarterly at minimum. If your numbers aren't making sense or you're seeing unexpected trends, consider getting a professional audit to figure out what's actually happening in your funnel.

Strategies to Grow LTV in SaaS

So you've calculated your SaaS metrics LTV. Now what?

We've tested these strategies across 100+ SaaS clients. Here's what actually moves the needle on LTV, ranked by typical impact:

Reduce Churn, every percentage point reduction in churn increases LTV considerably. When we work with clients on conversion optimization, we consistently find that improving the first-week experience has the biggest impact on 90-day retention.

Even the best ad campaign can't save a broken onboarding flow. That's where landing page design and onboarding optimization make the real difference.

Increase ARPA Through Upsells, your existing customers are way more likely to buy from you than new prospects. Implement usage-based pricing, add premium features, or introduce higher-tier plans. We've seen companies add 30% to their LTV by introducing a proper enterprise tier.

Improve Gross Margins, can you optimize hosting costs? Automate customer success? One of our clients saved $80K annually by switching from AWS to a combination of AWS and Cloudflare, margins went from 72% to 78% overnight.

Focus on Ideal Customer Profile, we've seen companies double their LTV by getting better at targeting their ideal customer. When we helped Originality.AI increase their conversion rate by 210%, a big part was getting laser-focused on who their ideal customer actually was.

Implement Annual Contracts, customers on annual plans typically have 30-50% better retention than month-to-month. The commitment effect is real.

Add Network Effects, if your customers get more value as more of their peers use your product (think Slack or Figma), retention improves naturally over time.

Companies that focus on how to increase LTV SaaS before scaling acquisition tend to have better outcomes. Get your retention solid first. Then turn on the aquisition fire hose.

LTV Tracking & Reporting

Having the right number doesn't matter if nobody looks at it. We've seen too many beautifully calculated LTV models gathering digital dust.

Your LTV should be front and center in your executive dashboard, right next to CAC and LTV:CAC ratio. Update it monthly. Tools like ChartMogul or ProfitWell connect to Stripe and calculate everything automatically. We help clients set up proper analytics tracking from day one.

Track LTV by acquisition channel (Google Ads customers vs organic vs LinkedIn), customer segment, and product tier. We had a client who discovered their organic search customers had 2x the LTV of paid customers, completely changed their marketing strategy.

If your LTV drops more than 10% month-over-month, that's a red flag. Build alerts. Your LTV directly informs your maximum CPA targets in Google Ads and LinkedIn.

Here's what healthy LTV benchmarks look like across different SaaS business models:

When we worked with Mixpanel to increase their qualified leads by 164%, we started by understanding their LTV by segment.

Conclusion

LTV isn't some magical metric that's going to solve all your growth problems. But it is the foundation for making smart acquisition decisions.

After working with 100+ SaaS companies, we've learned that companies who understand their unit economics make better decisions. They know when to step on the gas and when to pump the brakes.

Your LTV will change as your company evolves. Track it consistenly, update it regularly, and actually use it to inform your strategy.

If you're realizing your acquisition costs are too high or churn is killing your economics, sometimes you need outside perspective. Let's talk about your business goals.