Lifetime Value Calculation (SaaS Metric)
Formula is ARPU / Customer churn rate, but what happens when churn rate is 0%? (No customer churn in that period). Thanks.
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You simply would never run that formula as snapshot. In this case you at least need to limit the period for which you are forecasting, to get to a meaningful number or prob. adjust it.
By the way: look at churn over time. A lot of SaaS companies even have negative net churn for some time but in the long-term it becomes positive and/or moves towards an industry average. I would also aggregate the revenue / logos and work with company wide churn to get more meaningful numbers. Also try to go down from ARPU to different profit metrics because customer lifetime is most interesting in a cost / profit perspective because (i) CLTV is a metric for an optimization function, not an absolute (unless you use it as valuation input/comparison) and (ii) a ratio often cancels out crazy assumptions as they tend to be in both numbers and if it doesnt, at least the craziness becomes more obvious.
Thanks.
1) Can you provide what other profit metrics or things I should be taking a look at to evaluate a potential SaaS business?
2) To confirm: you should use logo churn % and not rev % for the LTV calculation right?
3) "...prob. adjust it"... how do you adjust it?
As a more rigorous way of calculating it, it would be the forecasted total contribution profit for the average customer into the future. Contribution profit because for each dollar of additional revenue we need to subtract out marginal costs associated with that additional revenue.
So forecast out probability-unweighted revenue per logo as ARPU forecasted into future (could grow or stay same each year depending on assumptions), then multiply each year by contribution margin, and probability-weight the year by the logo-retention rate x years out, i.e. the probability any given logo will actually still be around in that year. Then sum this up for 10-15 years. Logo-retention weighting approaches 0 over time, so additional years beyond 10 years or so don't change the LTV that much.
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there are really good documents on this. two i have been using over the years are page 20 of KPMGs report and the appendix (page 19+) of credit suisse' report. cant post links for whatever reason
google:
Transforming your SaaS business KPMG - the first PDF is the right one from 2016
2017 Software Outlook credit suisse - the first PDF is the right one from 2017
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