🎙️ Hey there, SaaSpreneurs!🎙️

Welcome back to another edition of SaaS Metrics School, where we dive into the intricate world of SaaS metrics. I'm your host, Ben Murray, and in today's episode, we are diving deep into the topic of "Advanced LTV" or alternatively known as the "Advanced Customer Lifetime Value Formula." 🚀

In previous episodes, we have covered the basics of customer lifetime value (LTV). But in this discussion, we address the concerns raised by many regarding the limitations of this traditional formula. Some argue that LTV fails to consider expansion and the cost of capital, making it less comprehensive for evaluating long-term profitability. 💡

So, join me in this thought-provoking dive into the intricacies of advanced LTV. By the end of this episode, you will have a deeper understanding of how to enhance the lifetime value formula without compromising its reliability. 🎯

You can also listen to this episode here.

📓Key Concepts to Learn💡

1. Advanced Customer Lifetime Value (LTV) Formula: The traditional LTV formula does not consider factors like expansion and the cost of capital. This introduces the concept of advanced LTV, which incorporates these elements to provide a more sophisticated understanding of a customer's lifetime value. 📈💡

2. Incorporating Expansion and Cost of Capital: I’ll discuss two approaches to including expansion and cost of capital in the LTV formula. In the numerator, the cohort ACV and ARPA can be adjusted for potential expansion, OR in the denominator, Churn can be offset with an expansion percentage number. Additionally, considering WACC or weighted average cost of capital in the denominator can increase the complexity of the calculation. 🔄💰

3. The Dangers of Advanced LTV: While advanced LTV offers a more comprehensive calculation, it becomes challenging to compare it with the cost of acquiring new customers (CAC). Mixing apples (new) and oranges (expansion) can lead to misleading insights. I also suggest looking at the cost of ARR (Annual Recurring Revenue) instead if the focus is on the cost of expansion. ⚠️🍏🍊LTV is traditionally focused on new acquisition. If we add an expansion component to the equation, the comparison to LTV is less applicable (apples to oranges).

4. Practical Usage of Advanced LTV: Advanced LTV is being used in practice but with only the WACC addition to the formula. For most cases, using the gross margin adjusted LTV calculation is considered safer. 👥📊

If you're interested in understanding and implementing advanced LTV to refine your business strategy, we highly recommend checking out this episode. It's a brief, yet informative discussion that sheds light on expanding the traditional LTV formula.

If you found this episode helpful, make sure to tune in to future episodes of SaaS Metric School to broaden your knowledge on essential SaaS metrics and finance topics.

Got any burning questions or specific metrics you'd like us to cover?

Drop us a line, and we'll do our best to address them in upcoming episodes.

Until next time, keep hustling and measuring those metrics!

Best regards,

Ben Murray
Host of SaaS Metric School

📝 Episode Recap 🎧

In episode 24 of SaaS Metrics School, host Ben Murray dives into the topic of advanced Customer Lifetime Value (LTV) and its potential dangers. He begins by acknowledging that the classic LTV formula doesn't consider expansion or the cost of capital. However, Ben explains that there are ways to make the LTV calculation more advanced by incorporating these factors.

To enhance the LTV formula, Ben suggests adjusting the cohort ACV and ARPA for potential expansion in the numerator, or offsetting churn with an expansion percentage number in the denominator. Additionally, he highlights the importance of considering the weighted average cost of capital or CAC when attempting to make LTV more sophisticated.

However, a key point of caution mentioned is the danger of comparing advanced LTV to CAC. Ben cautions that since CAC represents the cost to acquire new customers, it is not directly compatible with the expanded LTV calculation. Instead, he suggests looking at the cost of ARR (Annual Recurring Revenue) when considering the cost of expansion.

While Ben acknowledges that using advanced LTV is not widely practiced, he shares that some CFOs in large SaaS companies do incorporate CAC in their calculations. For practical purposes, he recommends using the gross margin-adjusted LTV to ensure accurate results.

Stay tuned for more insightful episodes from SaaS Metrics School, where Ben Murray educates his audience on the key metrics and formulas vital in the world of SaaS businesses.