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.
Trending Content - Investment Banking Forum
| +236 | UBS Healthcare | 49 | 1d |
| +71 | UBS MDs Treat Employees like Dogshit, Data to Prove it | 12 | 16h |
| +60 | Shana tova - happy new year | 12 | 23h |
| +58 | More diversity needed in the industry | 11 | 3d |
| +48 | NYC Wall Street Run Club | 13 | 3d |
| +40 | Lost all ambition / don’t care at all anymore | 16 | 16m |
| +24 | What is the role of an analyst at your firm? | 3 | 22h |
| +22 | Feeling a bad pattern forming. I need some help | 3 | 5d |
| +20 | "Don't include firm in Cover Letter's file name" | 9 | 18h |
| +19 | Reaching out to interviewer who rejected me | 2 | 4d |
Career Resources
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.
Following
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
Vel et ab omnis dolor tenetur quisquam deleniti sunt. Rerum iste recusandae aliquam qui. Alias labore exercitationem quasi sit ut quam.
Debitis expedita sit deserunt. Cum culpa voluptas ut. Nulla quae assumenda voluptas ratione rerum voluptas. Aut sit quo sunt fugit eum doloribus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...