How to Calculate Customer Lifetime Value (LTV)
Customer Lifetime values (also known as LTV) for SaaS companies is the total amount of revenue a customer will generate, on average, before canceling.
Let’s look at an example:
Widget SaaS company sells software to customers for $100 per month. On average, customers will use the service for 16 months before they cancel.
In this case, LTV = $1600
Why is it important to know Customer Lifetime Value (LTV)?
It’s important to know Customer Lifetime Value because it allows you to understand how much can be spent to acquire new customers.
If it costs $50 to acquire a customer using a certain marketing strategy and the Customer Lifetime Value is $2000, it is an easy decision to continue spending money to acquire users using that marketing channel.
Knowing LTV is important as it is a key growth metric for SaaS companies and allows them to make more informed decisions regarding how and when to grow.
