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LTV

Lifetime Value (LTV) is the cumulative Gross Profit net of CAC, generated by a cohort over time. LTV represents the gross profit of an average customer in the cohort.

LTV = the cumulative gross profit from a cohort in month x / the # of customers in the cohort - CAC

For example, if you wanted to find LTV for your January 2021 cohort at month 3, you would:

  • Sum the gross profit for each customer in the January 2021 cohort for January through April
  • Divide by the number of customers in the January 2021 cohort
  • Subtract CAC 

LTV is a helpful metric because it combines gross margins, sales efficiency, retention, and ACV to give an overall picture of how profitable a company’s 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 super-linearly over time; alternatively, when NDR < 100% LTV will be sub-linear and eventually asymptote, not growing any further.

The way SaaSGrid calculates LTV is sometimes called “observed LTV”. This is because it shows the actual LTV of cohorts based on revenue earned, gross margins, retention, and CAC. There are other LTV calculations that try to “compute” LTV by doing calculations like ACV / (1 - Logo Retention)  to calculate how many years the average company will contribute revenue for. This “computed LTV” is often displayed as an LTV / CAC ratio. The issue with these computed LTV metrics is that they assume consistent margins and retention are consistent over time, and can’t account for cohorts with > 100% Net Dollar Retention. While sometimes helpful for consumer SaaS companies, SaaSGrid believes observed LTV is the best metric for B2B SaaS.

SaaSGrid also computes the Weighted Average LTV for each cohort age. For example, if you wanted to find the Weighted Average LTV for month 3:

  • For every cohort that has reached Month 3, multiple Month 3 LTV by the size of the cohort
  • Sum all the products
  • Divide by the number of customers in all cohorts that have reached Month 3

Weighted Average gives a good sense of how a cohort will most likely behave at a certain age.

Settings: Segments, Date Range, Date Aggregation, Revenue Type, S&M Offset, Expense Segments

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Stage Conversion Rate

Stage Conversion Rate is the While Pipeline Value sums the total ARR of active opportunities in pipeline, weighted pipeline is weighted based on the current deal stage. Weighted pipeline value is a more accurate estimate of Closed Won ARR based on the current pipeline value.

How do I calculate pipeline?

Let's assume we have the following list of opportunities currently active in our sales process:

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Deal Name

Sales Owner

Stage

ARR

ACME Corp. - New Business
Bugs Bunny
Stage 1
$10,000
Bonner Books - Upsell
Bugs Bunny
Stage 2
$25,000
CHOAM - New Business
Daffy Duck
Stage 2
$15,000
Daedalus Research - Upsell
Daffy Duck
Stage 3
$30,000
Bugs Bunny
Electric Enterprise - New Business
Stage 3
$50,000
$20,000
Fabulous Factories - New Business
Daffy Duck
Closed Lost

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The total pipeline for these opportunities is $130,000. Additionally, we can also get pipeline totals for our two sales reps: Bugs Bunny ($85,000) and Daffy Duck ($45,000).

Note that Fabulous Factories - New Business is omitted from this sum, as the stage is marked as "Closed Lost".

We can summarize our pipeline by Stage to understand how much ARR is in each step of the sales process. To summarize the Pipeline ARR by Stage, we generate the following ARR table:

Stage 1 Pipeline

Stage 2 Pipeline

Stage 3 Pipeline

Total Pipeline

$10,000
$40,000
$80,000
$130,000

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While we have the total pipeline value here, we can apply the weightings to more accurately estimate how much of the pipeline ARR will be Closed Won.

What is probability to close?

Probability to Close is a percentage that estimates how much of the ARR that is in a particular stage of a pipeline is expected to be Closed Won. Typically, Probability to Close will be lower in earlier stages of the sales process and higher in later stages of the sales process.

If we multiply the probability to close by the Pipeline ARR, we'll get the Weighted Pipeline ARR value in each stage.

Stage 1

Stage 2

Stage 3

Pipeline ARR ($)

$10,000

$40,000
$80,000

Probability to Close (%)

25%
40%
65%
$2,500
$16,000
$52,000

Weighted Pipeline ARR ($)

Probability to Close assumptions for each stage assume that deals in different stages have a different chance of being won. Deals in Stage 1 are 25% likely to be won, while deals in Stage 2 are 40% likely to be won, and deals in Stage 3 are 65% likely to be won.

After applying the probability to close to the Pipeline ARR, we now have $2,500 in Stage 1, $16,000 in Stage 2, and $52,000 in stage 3, for a total weighted pipeline value of $70,500. This estimate is closer to the real value we expect to have in Closed Won ARR.