The Software as a Service (SaaS) lifetime value calculator is a tool that lets you analyze your SaaS sales (more of that in our SaaS metrics calculator) and estimate the customer lifetime value (LTV). You will be able to go through the whole sales process step by step and define all of the parameters that influence it. Read on to discover the meaning of all of the acronyms that this LTV calculator uses, and hopefully, by the end, you can get the most out of your business!
Make sure to take a look at the online marketing conversion calculator as well if you would like to figure out customer acquisition costs.
Basics of SaaS LTV estimation
Our customer lifetime value calculator works in two modes: simple and advanced. Let's begin by analyzing the parameters in simple mode.
- ARPA: Average Revenue per Account, also called the Average Revenue per User. It is the measure of money you make on every single subscription account per month.
- Gross margin: this percentage represents the portion of each dollar of revenue that your company retains as profit. For example, if your gross margin is 20%, it means that you retain $0.20 from every dollar of revenue. This value is calculated according to the formula:
gross margin = (revenue - costs)/revenue. It is set to 100% by default - which means that there are no costs per account on your side. You can also visit our margin calculator to learn more about gross margin.
- Churn: it is the percentage of users that stop using your service (cancel the subscription) each month. For example, if during the last month, you lost 3 out of your initial 100 subscriptions, your churn rate is 3%.
- LTV: the lifetime value of one customer account - this is the average net profit you will make from one customer account for the entire time they are doing business with you. This value will be calculated automatically.
How to calculate ARPA
What happens if you don't know the average revenue per account, or if it changes each month? In this case, you need to use the
advanced mode of our calculator and input some additional parameters.
- # of customers: it is simply the number of customers that use your service.
- MRR: the total Monthly Recurring Revenue is a measure of your predictable revenue stream. It can be used to get a clear picture of your revenue if you have various subscription plans. Simply calculate how much each of your customers pays per month and add all of these numbers together. To expand your knowledge about revenue, you can check out our revenue calculator or our revenue growth calculator.
- Account expansion: it is a value that simulates the increase of ARPA. You can set a fixed sum in this box. For example, an account expansion of $10 means that each of your customers will pay an additional $10 each month. If they started by paying $100 for the first month, they will pay $110 in the second, $120 in the third, and so on.
Customer lifetime value formula
Our SaaS lifetime value calculator uses the following equation to perform all calculations:
LTV = [0.5 * 1 / churn * (2 * ARPA + ARPA_growth * (1 / churn - 1))] * margin
Using our LTV calculator: an example
Let's assume you run a company that has a SaaS product with multiple subscription plans. You want to find out what is your LTV.
- Determine the number of customers. Let's say you have 25 customers in total.
- Calculate your MRR. You make a handsome $6,000 a month.
- The SaaS lifetime value calculator will automatically divide the MRR by the number of customers to get your ARPA - in this case, $250.
- Decide on your gross margin. Let's say that you need to spend 35% of your revenue on maintenance, so your gross margin is equal to 65%.
- Determine your churn rate. Let's say that during the first month, only 1 customer canceled their subscription plan. We will assume that the churn rate will be constant. 1 of 25 customers is 4%.
- Decide on the account expansion cost. Let's say it is equal to $0 - you don't plan to introduce an expansion option.
- The LTV calculator will automatically find the LTV of your product. For our example, it is equal to $4,062.50. That means that every customer you have will spend, on average, $4,062.50 on your SaaS product before you they unsubscribe.