There are a few different ways to calculate the lifetime value (LTV) of a customer for a SaaS business. The most common way is to take the revenue from all future payments and subtract the costs associated with acquiring and retaining that customer. This can be done using either a discounted cash flow (DCF) model or a simple multiplication formula.
The first step is to determine the churn rate, or the percentage of customers who cancel their subscription each month. For example, if your churn rate is 5%, that means that 5% of your customers will cancel their subscription every month. Then, you need to calculate the average revenue per user (ARPU). To do this, simply take your monthly revenue and divide it by the number of active users.
Once you have both of these numbers, you can use one of two methods to calculate LTV. The first method is called the DCF method. To use this method, you need to discount all future cash flows by the monthly churn rate. So, if your ARPU is $100 and your monthly churn rate is 5%, your LTV would be $2,000 (($100/0.05)-$100)).
The second method for calculating LTV is much simpler and only requires that you multiply ARPU by 12 (to get annual revenue) and then multiply that number by how long you expect customers to stay subscribed (in years). So, using our same example from before, if we expect our customers to stay subscribed for 2 years on average, then our LTV would be $4,800 (($100 x 12) x 2).
Whichever method you choose to use, calculating LTV is an important part of understanding and growing your SaaS business. By understanding how much each customer is worth over time, you can make better decisions about acquisition strategies and retention efforts