How to calculate lifetime value for SaaS products

Lifetime value (LTV) is a crucial yet complex metric for subscription-based or SaaS products, offering insights into revenue forecasting and the value provided to premium users. It allows companies to make informed decisions regarding pricing strategies, customer acquisition costs, and growth channels, as opposed to relying solely on simpler metrics like conversion rates, which can be misleading if considered in isolation. Calculating LTV involves multiplying the subscription price by the number of renewals, and it can be analyzed using 12/13-month benchmarks or cohort-based methods to project revenue more accurately. LTV is significant for assessing the performance of different subscription plans, comparing price points, and understanding the relationship between LTV and customer acquisition costs (CAC), thus guiding marketing and product strategies. Although challenging to measure precisely due to time constraints, teams often use historical data to forecast LTV, aiding in more strategic decision-making and avoiding potential revenue-negative decisions.