The SaaS lifetime value calculator is a tool that lets you analyze your SaaS sales and estimate the customer lifetime value (LTV). You will be able to go through the whole sales process step by step and define all parameters that influence it. Read on to discover the meaning of all acronyms that this LTV calculator uses and to get the most of your business!
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 – it means that there are no costs per account on your side.
- 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: lifetime value of one customer account – the average net profit you will gain from one customer account during the whole time he makes 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 additional parameters.
- # of customers: It is simply the number of customers that use your service.
- MRR: 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 number together.
- 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 py $10 more each month. If they started by paying $100 during 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. Let’s assume that you make $6000 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. We can assume that during the first month, only 1 customer canceled the subscription plan and 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 automatically find the LTV of your product. In this case, it is equal to $4062.50. That means that every customer you get will spend on average $4062.50 on your SaaS product before you lose him.