Customer Lifetime Value (LTV) is the revenue you can expect from an average subscriber over their entire lifetime with you, from sign-up to cancellation. For any subscription business, SaaS included, it is one of the most useful indicators of overall health, and analysing it helps you make better decisions about customer acquisition. Here is how to calculate it and put it to work.

What is Customer Lifetime Value?

Defining Customer Lifetime Value (LTV)

In SaaS, LTV tells you the amount an average customer spends on your product over the whole of their relationship with your company, from contract signature to churn.

If a customer spends €500 a month on your SaaS product and stays for 12 months before cancelling, their lifetime value is €500 \* 12 = €6,000.

The higher the LTV, the more that customer is worth to your business. That makes it a very practical way to see which users bring you the most value.

LTV, CLTV and CLV: what's the difference?

Customer Lifetime Value (LTV) also goes by the acronyms CLTV and CLV. They are all synonyms for exactly the same metric, although there are several ways to calculate it.

How to calculate Customer Lifetime Value (LTV)

The basic idea is simple: LTV equals average revenue per customer multiplied by customer lifetime. The catch is that the second figure is usually unknown or hard to pin down, especially if your company has only been around for a few years. That is why in SaaS, LTV is usually a forward-looking estimate rather than a measure based on historical data.

Method 1: ARPA / monthly churn rate

Most SaaS companies use this formula:

LTV = ARPA / Monthly Churn Rate

ARPA (Average Revenue Per Account) is the average revenue per customer, in other words your average MRR per customer. To calculate it, divide your total MRR by your number of customers.
Churn rate is the percentage of customers you lose each month: customers lost over a given period / number of customers at the start of that period.

So with an ARPA of €100 and a churn rate of 2%, LTV is €100 / 0.02 = €5,000.

Even with limited history, this gives SaaS companies a reliable way to estimate customer lifetime value from real performance data.

Method 2: factoring in gross margin

Another approach is to multiply ARPA by your gross margin, which gives a more accurate picture of the value generated once direct costs are taken out. The formula becomes:

LTV = (ARPA \* Gross Margin %) / Monthly Churn Rate.

Gross margin is total revenue minus direct costs (infrastructure, direct purchases and so on).

Advanced methods

More sophisticated methods account for expansion, discounts or the fact that churn is not linear across the customer lifecycle. We won't go into them here, but this article is a good place to start: What's your TRUE customer lifetime value (LTV)?

The LTV/CAC ratio

The LTV/CAC ratio is a key indicator of a SaaS company's financial health and growth potential.

CAC stands for Customer Acquisition Cost and measures how much you spent to win a new customer.

The LTV/CAC ratio compares what a customer is worth over their lifetime with what it cost to acquire them. The higher your LTV and the lower your CAC, the more profitable your business is likely to be.

The formula for CAC is: Total sales and marketing spend / Number of customers acquired over a given period. If you spent €20,000 on sales and marketing and won 50 customers over that period, your CAC is €400.

The LTV/CAC ratio informs strategic decisions for your SaaS business, such as:

Which type of customer is the most profitable to acquire?
How much should I invest to acquire a given type of customer?
How many salespeople should I hire to bring in new customers?

Benchmark: what is a good Customer Lifetime Value?

LTV shouldn't be read in isolation. It is the LTV/CAC ratio that investors use as their reference and that lets you benchmark yourself.

Your LTV/CAC ratio should be at least 3:1. Below 3, you are either spending too much to acquire customers, failing to keep them over time, or both.

On the other hand, if your ratio is above 5:1, you are probably underinvesting in sales and marketing and holding back your growth.

How to improve Customer Lifetime Value

Now that you know your LTV, the next step is to improve it and boost profitability. There are only two levers you can pull: churn and average revenue per customer.

Here are a few ways to improve retention and upsell in B2B SaaS:

Reduce churn

Improve your onboarding journeys. Research shows a very clear link between successful onboarding and long-term loyalty. A study by Sixteen Ventures Research found that 80 to 90% of customers who cancel within the first three months cite a lack of perceived value as the reason. Users need to be convinced as quickly as possible that your product delivers enough value. Deliver value and your customers will be satisfied. And satisfied customers spend more, for longer.
Analyse churn by running post-mortems with your customers. Ask every churned customer why they left, either through the CSM who owned the account or through online surveys, depending on the size of your portfolio. Group the reasons into categories and dig into the verbatims to find where you need to improve. Generative AI tools such as ChatGPT can help you analyse unstructured responses much faster. Then adjust your strategy accordingly.
Check whether some of your plans churn more than others, and refine your pricing. If your cheapest plans also generate the most churn, you probably need to rethink those plans and the support that comes with them.
Break your analysis down by acquisition source to see whether some channels bring in customers who turn out to be less profitable than average. Adjust your marketing plans accordingly. Cohort analysis can make this much more effective.
Look for specific lifecycle stages where churn spikes (onboarding, adoption, first renewal and so on). Refine your customer journey and raise your game at those critical moments. A Customer Success Platform can help you structure your processes and automate time-consuming tasks.
Set up a health score to spot the early signs of churn automatically and step in proactively with the customers who need it. Here again, a Customer Success Platform lets you monitor your key metrics and flags issues when needed.

Increase average revenue per account (ARPA)

Invest in Customer Success. The numbers speak for themselves: Customer Success pays for itself. To give just one figure, a Gainsight x Benchmarkit study shows that companies with Customer Success Managers have retention 14 points higher than those without.
Make your CSMs sales-aware and train them. Whether the CSM closes the deal or hands it over to another team (Sales or Account Management), CSMs need to understand why generating additional business matters and, where needed, be trained to raise it naturally with their customers.

"A CSM's job isn't to upsell or cross-sell. It's to make customers so successful with your product that they want to do more with it and buy more. That's a big difference!" Nicolas Garmy, Co-Founder, Skalin

Build a product that encourages upsell: avoid monolithic products where every customer gets every feature. Design your platform in modules that are unlocked depending on the plan. You can add premium features as paid options. And don't hesitate to combine several business models, for example usage-based billing on top of a standard subscription.
Raise your prices regularly. An indexation clause in your terms and conditions lets you link your prices to inflation. You can also review your pricing regularly, especially when your product makes major functional leaps, and test changes with a panel of customers to see how they land.

Need to scale your Customer Success?

Meet Skalin, the next-generation Customer Success platform that makes teams more productive with AI

B2B SaaS: How to Calculate and Analyse Customer Lifetime Value (LTV)