LTV Formulas by Business Model: SaaS, E-Commerce, and B2B Assumptions
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Category: CRM, LTV & Customer Management, Marketing Glossary
Authors: Shusaku Yosa
Choose an LTV formula that matches how the business earns value. SaaS depends on contractual retention, commerce on repeat purchases, and B2B accounts on renewals and expansion. Define the customer unit and the timing of earnings before applying a formula.
The companion LTV calculation guide covers revenue versus gross profit and observed versus predicted value. This article focuses on model assumptions. Every amount, probability and retention rate below is fictional, with monetary examples in Japanese yen.
Select the model
Business | Starting calculation | Appropriate conditions | Main failure mode |
|---|---|---|---|
Contractual SaaS | Monthly ARPA × gross margin ÷ monthly customer churn | Stable revenue, margin and churn probability in a simple model | Mixing customer and revenue churn; overstating a long tail |
E-commerce | Cohort net revenue or gross profit ÷ original customers over a fixed window | Reliable customer identities and equal observation windows | Removing inactive customers; presenting observed value as full lifetime value |
B2B | Sum of expected contract and expansion profits by period | Account-level contracts, probabilities and delivery costs | Counting contacts as customers; double counting expansion |
The order-value, frequency and duration approach described in Shopify’s revenue LTV guide also depends on consistent time units. The worked models below are planning examples, not industry benchmarks.
SaaS: keep every input monthly
Assume monthly revenue per paying account, or ARPA, of ¥10,000, an 80% gross margin and 4% monthly customer churn among accounts active at the start of the month. Simple gross-profit LTV is ¥10,000 × 80% ÷ 4% = ¥200,000. Revenue LTV would be ¥250,000, so label the measure explicitly.
This formula corresponds to an indefinite model in which each account pays for the first month, earns ¥8,000 of gross profit and has a 4% probability of churning at each month-end. Retained accounts earn the same amount in later months. It excludes expansion, price changes, customer-age effects, discounting and changing maintenance costs.
With limited history, use a finite horizon. Under the same month-end churn convention, expected gross profit over 24 months is ¥8,000 × (1 + 0.96 + 0.96 squared + … + 0.96 to the power of 23), or approximately ¥124,917.
Monthly churn assumption | Indefinite simple gross-profit LTV | Expected gross profit over 24 months |
|---|---|---|
2% | ¥400,000 | Approximately ¥153,688 |
4% | ¥200,000 | Approximately ¥124,917 |
6% | Approximately ¥133,333 | Approximately ¥103,133 |
Low churn makes the indefinite model especially dependent on distant future periods. Do not infer infinite value from a short period with no churn. Set a horizon and a downside case. Avoid dividing monthly ARPA by annual churn or substituting net revenue churn, which may include expansion, into a customer-survival model without changing the model itself.
E-commerce: build from cohorts and customer age
Suppose 200 customers make their first purchase in the same month. During the first 12 months after acquisition, they generate ¥9,600,000 of net revenue and ¥5,760,000 in cost of sales. Observed revenue LTV is ¥48,000; observed gross-profit LTV is ¥19,200. Keep all 200 original customers in the denominator, including those who never repeat.
To forecast later periods, align customers by months since acquisition. Estimate the proportion who purchase, orders per purchasing customer, net order value and gross margin. If 10% of the original cohort is expected to make one ¥8,000 purchase in month 13 at a 40% margin, expected gross profit per original customer for that month is 0.10 × 1 × ¥8,000 × 0.40 = ¥320.
Add later months separately and show which values are observed and which are forecast. In noncontractual commerce, no purchase does not necessarily mean permanent churn. Seasonal or infrequent purchases can make a simple “lifetime equals one divided by churn” assumption misleading.
B2B: model contracts, renewals and expansion
Assume first-year gross profit of ¥600,000 from one account, an 80% probability of second-year renewal and ¥500,000 of gross profit if renewed. Suppose 25% of renewed accounts buy an additional service worth ¥200,000 in gross profit. Expected two-year gross profit is:
¥600,000 + 0.80 × ¥500,000 + 0.80 × 0.25 × ¥200,000 = ¥1,040,000.
If expansion is already included in the ¥500,000 renewal value, do not add the final ¥40,000 again. Base probabilities on comparable account history and explicit conditions rather than an unsupported sales opinion. Record renewal timing and delivery capacity. Multiple contacts at one company remain one customer when the model uses accounts.
Handle discounting, maintenance and CAC explicitly
For a longer horizon, expected cash flows can be discounted by dividing each period’s amount by (1 + the period discount rate) raised to the relevant period number. Align monthly and annual units and use the organization’s financial policy for the rate. If dedicated retention costs are deducted beyond cost of sales, give the resulting profit measure a name that reflects that scope.
The examples in this article do not deduct customer acquisition cost. Subtract CAC once when examining acquisition economics. A value measure that already includes acquisition spending must not have CAC deducted again.
Save each forecast version and evaluate it against later observations. Do not overwrite old assumptions to make a past prediction look accurate. Learning whether price, retention or delivery cost caused the error is more useful for the next budget decision.
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