Lifetime Value (or LTV) measures the amount of revenue a customer will generate over the entire duration of their subscription. LTV is used to assess the long-term profitability of acquiring and retaining customers. LTV helps SaaS companies understand how much they can spend on customer acquisition while remaining profitable. In addition to LTV, SaaSGrid allows for Simple LTV and Weighted Cohort LTV calculations.

# How do I calculate LTV?

LTV is the average Gross Profit (net of CAC), generated by customers a specified amount of time since they first become a customer.

To calculate LTV from a cohort start month until month X, LTV can be represented as the following formula:

Each of the components in the formula are defined as follows:

- Cumulative Gross Profit is the total amount of gross profit over the cohort lifetime until Month X

- # of customers in cohort is the total number of customers that existed in the cohort month

- CAC is the customer acquisition cost, or the total amount of sales and marketing spend divided by the number of new customers acquired as a result

For example, to calculate LTV for January 2024 cohort at Month 3, the following calculations will be necessary:

- Sum the gross profit for each customer that existed in the January 2021 cohort for January through April

- Divide by the number of customers in the January 2021 cohort

- Subtract the CAC for this cohort

# What is Simple LTV?

Simple LTV is an approximation of customer lifetime value (CLTV) using annual contract value, gross margin, and churn rates. To calculate the LTV/CAC ratio, SaaSGrid uses the simple LTV. Simple LTV is calculated with the following formula:

Each of the components in the formula are defined as follows:

- Annual Contract Value is the average annualized contract value of all customers

- Gross Margin is the percentage of revenue that remains after subtracting COGS

- Churn Rate is the percentage of customers that churn after some period of time

For example, with an ACV of $21,000, a gross margin of 40%, and a churn rate of 13%, Simple LTV is equal to ($21,000*40%)/13%, or $64,615. This can be interpreted as the average lifetime value that a customer will have. Note that to calculate a trailing simple LTV, Gross Margin and Churn Rate must have the same trailing period.

# What is Weighted Average LTV?

LTV can be weighted by cohort size to describe value for a particular month in the customer lifetime. For example, to find Weighted Cohort LTV for Month 3, the following calculations are needed:

- For every cohort that has reached Month 3, multiply Month 3 LTV by the size of the cohort

- Sum the product across all cohorts

- Divide the total by the number of customers in all cohorts that have reached Month 3

Weighted Average LTV can indicate how a cohort will most likely behave at a certain age.

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# How should I interpret LTV?

LTV combines gross margin, sales efficiency, retention, and ACV to give an overall picture of how profitable your customers are. When LTV goes from negative to positive, it represents the “true” CAC payback period after S&M expenses and COGS, including cohorted expansion. A company with > 100% net dollar retention will see LTV grow linearly over time; alternatively, an NDR < 100% will result in LTV stop growing and flatten out.

SaaSGrid allows you to explore your LTV by segments, teams, and even individual customers. Talk to us here to learn more!