LTV calculation

Discover how Fincome calculates LTV (customer lifetime value). Use this indicator to estimate the average financial value generated by a customer over their relationship with your company.

1. What is LTV?

LTV, or Lifetime Value, refers to the total expected value of a customer over the entire duration of their relationship with the company. It represents what a customer contributes in revenue (often gross) during their “life” in the active base.

It is a synthetic metric, often used in the following contexts:

• Assessing the profitability of a channel or customer segment

• Monitoring the overall performance of a business model (notably in SaaS or e-commerce)

• Calculating the LTV/CAC ratio, a key indicator to judge whether the acquisition cost is sustainable

2. How to calculate LTV?

$$LTV = ARPA / Taux de churn moyen sur les 6 derniers mois$$

Where:

• ARPA (Average Revenue Per Account): Average revenue per customer over a given period. Key metric to measure the impact of a pricing change

• Churn rate: Loss of MRR related to the cancellation of a customer's last active subscription (see Churn Rate).

3. Practical example: calculating LTV in SaaS

Let's take an example to illustrate the calculation of LTV for a SaaS company:

• 50 customers purchased an annual subscription at €120 each.

• 100 customers chose the basic monthly plan at €12 per month.

• 60 customers subscribed to the premium plan at €18 per month.

• The churn rate over the last six months was 3%.

To determine the LTV, we must first calculate the Monthly Recurring Revenue (MRR), then the Average Revenue Per Account (ARPA):

To calculate LTV, we first determine the monthly recurring revenue (MRR), then the average revenue per account (ARPA):

• MRR = ((120/12) 50) + (100 12) + (60 * 18) = €2,780

• Total number of subscribers = 50 + 100 + 60 = 210;

• ARPA = €2,780 / 210 = €13.24;

• LTV = ARPA / churn rate = 13.24 / 3% = €441.33.

Thus, the average customer lifetime value for this SaaS company is €441.33.

4. The importance of the LTV/CAC ratio

The LTV/CAC ratio (Lifetime Value / Customer Acquisition Cost) is a key strategic indicator in SaaS to evaluate the profitability of your acquisition model. It relates:

• LTV: the average value of a customer over their entire lifetime (average revenue generated before churn),

• CAC: the average cost to acquire a new customer, including marketing, sales, tools, and human resources expenses associated with acquisition.

LTV/CAC RATIO	INTERPRETATION
< 1	The customer brings in less than they cost → non-viable model.
≈ 1	Acquisition at break-even, but without margin → barely sustainable.
2 to 3	Profitable model, but margin still limited.
> 3	Excellent: each customer generates 3× or more of their acquisition cost.