Understanding your customer'sLifetime Value (LTV) is essential for any SaaS startup. It’s more than just a metric—it’s often used a guiding blueprint for sustainable growth. LTV helps you determine how much you can afford to spend on acquiring customers and where to focus your resources to drive long-term profitability.
While the basic formula for calculating LTV can give you a quick snapshot, it often overlooks critical factors like changing customer behavior, upselling opportunities, and cohort/segment differences.
In this guide, we’ll explore five alternative methods for calculating LTV, tailored to SaaS startup founders looking for simple and actionable alternative ways to calculate the lifetime value of their customers.
Customer Lifetime Value (LTV), is a SaaS metric that predicts the total revenue (ie. the "customer value") a business can reasonably expect from customers throughout the entire duration of their relationship with the company (ie. the "lifetime"). It's a forward-looking metric that helps you understand the long-term value of acquiring and retaining customers.
As a refresher, the standard formula for calculating Customer Lifetime Value is:
Simple LTV Formula = ARPU / Churn Rate
Example: If your monthly ARPU is $100 and your monthly churn rate is 5% - pretty standard for SaaS - your LTV would be:
$100 / 0.05 = $2,000
While easy to calculate with basic inputs, this method can oversimplify your customers' behavior and business. It assumes all customers behave the same, doesn't account for upsells, and uses static churn rates. For growing startups, these assumptions can lead to underestimating or misjudging true customer value.
This method groups customers by when they signed up (time-based), or sometimes by a specific event or feature adoption. The goal is to track how a group of customers who signed up at the same time behaves over time. You might look at how churn, retention, and revenue evolve for customers who signed up in, say, Q1 2024 versus Q2 2024.
Formula = (Revenue from Cohort – Costs) / Cohort Churn Rate
If you want to simplify it, you can simply remove Costs from the formula and only look at Cohort Revenue / Cohort Churn Rate.
Why it works: By analyzing cohorts, you can track churn and upsell trends in specific customer segments. This gives you better insight into what acquisition time periods lead to higher LTV. For example, do users acquired during the Christmas period have higher churn rates than average?
Best for: Ideal for SaaS startups with distinct customer acquisition channels, seasonal fluctuations, or product usage patterns.
This method groups customers based on their characteristics—like company size, geographic region, industry, or even their behavior within the product (e.g., power users vs. casual users). It calculates LTV separately for each group to reflect their unique behaviors.
Formula = Segment Revenue / Segment Churn Rate
Why it works: Different customer segments often have different retention rates and upsell potential. For example, you might find that customers in the “enterprise” segment have a higher LTV than SMB customers because they retain longer and are more likely to buy add-ons/upsell to higher plans. Understanding these variations helps startups allocate marketing budgets or product resources more effectively.
Best for: Startups with a diverse customer base and different customer behaviors.
Churn isn’t always static. Customers are more likely to churn at specific stages of their lifecycle - like early in their onboarding or after contract renewal. This method adjusts the LTV calculation by factoring in fluctuating churn rates over time.
Formula = ARPU / Dynamic Churn Rate
This is the most complex method out of all the ones in this guide, but still fairly easy to calculate. Let's look at an example:
Say you've observed different churn rates every 3 months in the customer lifecycle:
In that case, your dynamic churn rate would be calculated as a weighted average: (0.10 * 0.3) + (0.05 * 0.3) + (0.02 * 0.4) = 0.053
If your monthly ARPU is $100, your Churn-Adjusted LTV would be: $100 / 0.053 = $1,887
Why it works: By adjusting for periods of high churn (like during the onboarding phase) and lower churn, you can get a more accurate representation of LTV.
Best for: SaaS companies experiencing churn fluctuations, especially during onboarding or at specific stages of customer engagement.
This method focuses on net revenue retention (NRR), which includes any expansion revenue from upsells, cross-sells, and upgrades, minus any revenue lost from churn over a given time period. It captures the value of maintaining and growing existing customers over time.
Formula = (Initial Revenue + Expansion Revenue - Churned Revenue) / Churn Rate
Why it works: NRR-based LTV is particularly valuable for SaaS companies where increasing revenue within the existing customer base is a core revenue strategy. By factoring in both churn and expansion, this method provides a more holistic view of customer value.
Best for: Perfect for startups with strong upsell/cross-sell opportunities and those looking to focus on revenue expansion as part of their long-term growth strategy.
This method shows you the relationship between the total value a customer brings over their lifetime (LTV) and the time it took to recover the initial acquisition cost (Payback Period). Essentially, it shows how many times over you’ll recover your acquisition cost by the end of the customer’s lifetime. It's more of a long-term profitability multiplier rather than a breakeven point.
While you've likely heard of the CAC:Payback Period metric, which is very common in SaaS, the LTV:Payback Period ratio might be more useful for you when:
While the CAC:Payback Period focuses on how quickly you recover your initial investment, the LTV:Payback Period ratio gives you a view of the potential long-term return on that investment. This makes it particularly useful for investors and financial planning. However, we still recommend using both metrics to get a more comprehensive understanding of your unit economics.
LTV to Payback Period = LTV / Payback Period
Example:
If your LTV is $2,000 (calculated using the "simple" LTV method) and your Payback Period is 5 months, your LTV:Payback ratio would be: $2,000 / 8 = 250
This result of 250 doesn't represent dollars, but rather a multiplier. It means that over the customer's lifetime, you expect to recover your acquisition costs 250 times.
Why it works: Cash flow is crucial for early-stage startups. This calculations helps you understand both the short-term timeline for recovering CAC (payback period) and the long-term profitability of each customer. It allows you to manage liquidity effectively, while also focusing on maximizing value over time.
Best for: Ideal for startups that are investing significantly in customer acquisition and need to monitor both short-term efficiency and long-term profitability.
The traditional LTV formula is a helpful starting point for SaaS founders. However, to truly unlock the full potential of customer value and drive sustainable growth, it’s crucial to adopt more holistic LTV models that factor in dynamic customer behavior, revenue expansion, and churn patterns.
By embracing these alternative methods, you can:
Stay in the loop with updates from our team and community.
Once a month.
.png)
