6 Proven Steps to Calculate the Lifetime Value of a SaaS Customer for Marketers

Is your LTV calculation just guesswork?

Without accurate data, you risk poor forecasting and inefficient budget allocation. This can seriously hinder your company’s overall growth and scalability.

This leads to frustration when leadership challenges your numbers. Investing in unprofitable customer segments becomes a real, costly risk you can’t afford.

Churn is a silent profit killer that directly erodes LTV. Recurly reports the average churn rate is 3.5% for B2B SaaS companies. This figure seems small, but it significantly impacts your long-term revenue.

To build a scalable growth engine, you need a standardized framework for calculating LTV that you can trust and present with confidence.

In this article, I’ll show you exactly how to calculate the lifetime value of a SaaS cutomer using six proven steps for accurate, actionable results.

You’ll gain the confidence to justify your marketing spend and make smarter, data-driven decisions that truly boost your company’s ROI.

Let’s dive in.

1. Calculate Average Revenue Per Account (ARPA)

What does each account truly contribute?

Without this figure, LTV calculations are guesswork, making it impossible to accurately forecasting your recurring revenue or marketing budget needs.

You can’t confidently allocate resources or prove marketing’s direct impact. This leaves you guessing which of your customer segments are truly the most valuable.

For instance, Gusto shows a company calculates ARPA as $109 from its total MRR and user count. This is your baseline.

This initial clarity is crucial. Let’s establish your ARPA to build a solid foundation for the entire LTV model you’re creating.

So, here is how you do it.

First, you’ll need to find your total Monthly Recurring Revenue (MRR) for a specific period. Then, simply divide that figure by your active accounts.

The result is your ARPA. This single metric provides a clear, average revenue value that immediately brings clarity to your customer base’s financial contribution.

If your MRR is $50,000 from 500 customers, your ARPA is $100. This step is fundamental to calculating the lifetime value of a SaaS customer accurately.

This number grounds your entire analysis.

With a reliable ARPA, you can confidently move to the next steps, like determining your gross margin and measuring churn, which we discuss next.

Ready to build on this ARPA foundation and confidently optimize your LTV strategy for maximum impact? Book a discovery call with our SaaS marketing agency to accelerate your growth.

2. Determine Gross Margin Percentage

Is your LTV missing a key piece?

Focusing only on revenue ignores the direct costs of serving customers, giving you an inflated view of their value.

Without knowing your true profitability, you risk overspending on acquisition. You’re flying blind, unable to accurately forecast or set sustainable budgets for company growth.

While calculating profitability and setting sustainable budgets, understanding SaaS marketing agency costs can further optimize your acquisition strategy.

This oversight means you could be investing in customer segments that are actually unprofitable, undermining your long-term financial stability.

This incomplete picture makes true LTV impossible. To fix this, you must determine your gross margin first.

This is where gross margin comes in.

Your gross margin percentage reveals the true profitability of your revenue after you subtract the direct costs of serving your customers (COGS).

These costs include hosting, third-party software licenses, and specific customer support team salaries. They directly impact customer profitability and must be included.

The formula is: (Total Revenue – COGS) / Total Revenue. Applying this metric is a crucial step for calculating the lifetime value of a SaaS customer.

This metric provides a clear profitability snapshot.

Using this figure ensures your final LTV, which builds upon the ARPA you already found, is grounded in actual profit, not just misleading top-line revenue.

3. Measure Monthly Customer Churn Rate

How many customers do you lose monthly?

Ignoring customer churn creates a major blind spot in your financial projections and completely skews any LTV calculations you attempt.

Without a firm grasp on this metric, you risk overspending on acquisition while underinvesting in retention, a costly mistake for your SaaS business.

According to Recurly, the average churn rate for B2B SaaS is 3.5%. That seemingly small percentage quickly erodes your recurring revenue.

Quantifying this leakage is crucial for understanding true customer longevity and forecasting revenue with any degree of accuracy.

So, you must calculate your churn rate.

This metric tells you the rate at which customers cancel subscriptions. It’s a direct input for the LTV formula we’ll discuss later.

You can calculate this by dividing the number of churned customers by the total customers from the start of the month. This gives you a clear percentage.

For example, if you lost 10 customers from a starting base of 500, your churn is 2%. Understanding this is vital for calculating the lifetime value of a SaaS customer.

This figure reveals your business’s stability.

A low churn rate indicates a healthy, sustainable business model and validates that you are delivering continuous value to your customers.

4. Apply SaaS LTV Formula

Now, let’s apply the LTV formula.

Applying it with inconsistent data leads to unreliable results that are hard to defend.

This makes it tough to justify marketing spend or forecast revenue, creating anxiety when challenged by leadership. It stalls your budget requests.

Your LTV figure becomes a vanity metric instead of a strategic growth tool.

This guesswork undermines your strategy. Let’s bring clarity to the calculation and put the final pieces together.

Speaking of strategic growth and efficiency, my guide on SaaS marketing automation tips can help you scale faster.

Here is the standard LTV formula.

You’ll combine the metrics from the previous steps we discussed: your Average Revenue Per Account (ARPA), gross margin, and monthly customer churn rate.

The simple formula is: LTV = (ARPA x Gross Margin) / Customer Churn Rate. It directly connects revenue to retention.

For example, with an ARPA of $200, 80% margin, and 4% churn, the LTV is $4,000. Correctly calculating the lifetime value of a SaaS cutomer gives you this definitive number.

This one single metric is powerful.

It provides the clear, data-backed figure you need to confidently set budgets, prove marketing ROI, and guide all your strategic growth decisions.

5. Segment Customers by Value Tier

Not all your customers are created equal.

Averaging all users gives you one misleading LTV figure that hides critical performance differences between your customer segments.

You might overspend acquiring low-value users or underspend on high-value ones. This is a critical forecasting error that directly impacts your marketing budget.

Withorb highlights how tiered pricing structures are common for this very reason. This practice offers a natural way to segment your LTV calculations.

So, let’s group your customers by value.

Create distinct customer cohorts based on your existing pricing tiers—like Basic, Pro, and Enterprise—or by their individual ARPA, which we discussed earlier.

Next, you’ll calculate a separate LTV for each cohort using the same core formula. This gives you precise LTV figures for each of your customer groups.

This tiered method improves calculating the lifetime value of a SaaS customer. You may find Enterprise clients have a 10x LTV over Basic users, guiding smarter budget allocation.

This clarity is a complete game-changer.

This granular insight empowers you to tailor both marketing spend and retention efforts to the specific segments that drive the most sustainable long-term revenue.

Ready to gain this clarity and optimize your marketing budget based on precise LTV? Book a discovery call with Boterns to tailor your strategy.

6. Automate Tracking with Analytics Tools

Manual LTV tracking is a nightmare.

Relying on spreadsheets is slow and prone to human errors, making your important LTV calculations instantly outdated.

This manual process means you base critical marketing decisions on historical snapshots, not live data. It seriously undermines forecasting accuracy and your credibility with leadership.

Without real-time tracking, you completely miss churn risks and upsell opportunities as they happen, leaving valuable recurring revenue on the table.

This constant data-wrangling prevents strategic focus, but there’s a better way to get the accurate, real-time metrics you need.

Automation is your answer here.

Instead of manual calculations, analytics platforms like ChartMogul or ProfitWell integrate directly with your billing and CRM systems for you.

These tools automate data collection, pulling in ARPA and churn rates without you lifting a finger or opening another complicated spreadsheet.

They streamline the process of calculating the lifetime value of a SaaS customer by providing a live dashboard with continuous updates on your key metrics.

This finally gives you a single source of truth.

By automating this final step, you transform LTV from a static report into a dynamic, strategic tool for driving real business growth.

Conclusion

Stop guessing your customer lifetime value.

This guesswork leads to inefficient marketing spend and poor forecasting, leaving you unable to confidently justify your crucial budget requests to leadership.

The opportunity cost is real. Paddle reports the average B2B SaaS churn rate is now -1.59%, proving negative churn is achievable. This is a game-changer for maximizing long-term customer profitability and growth.

But now you have the right framework.

With the six steps I’ve outlined, you can finally build a reliable, scalable LTV model that brings clarity to your growth strategy.

For broader strategic insights, my analysis of SaaS Total Addressable Market provides valuable perspectives for gaining investor edge.

By understanding how to calculate the lifetime value of a SaaS cutomer for each segment, you can optimize spend and prove marketing’s direct ROI with confidence.

I challenge you to automate your LTV tracking this week. It’s the fastest way to get the actionable, real-time data your business needs.

Transform raw data into strategic growth.

Ready to move beyond guesswork and truly maximize your SaaS marketing ROI? Book a discovery call with me to discuss how we can transform your LTV data into actionable growth strategies.