SaaS Valuation Math: MRR, ARR, and LTV
If you are building a Software-as-a-Service (SaaS) startup, traditional retail math no longer applies. Venture capitalists evaluate your business entirely based on recurring revenue and customer retention.
1. MRR & ARR (Recurring Revenue)
Monthly Recurring Revenue (MRR) calculates the predictable revenue you expect every month. By multiplying MRR by 12, you get your ARR (Annual Recurring Revenue).
2. Customer Lifetime Value (LTV)
LTV predicts the total money a customer will spend before canceling. Formula: ARPU รท Monthly Churn Rate. According to industry standards, your LTV should be at least 3 times higher than your Customer Acquisition Cost (CAC).
Frequently Asked Questions
What happens if my churn rate is 0%?
In a theoretical scenario with 0% churn, your LTV would be infinite because customers never leave. In reality, some churn is inevitable due to business closures or payment failures.
How do you calculate SaaS LTV?
Customer Lifetime Value (LTV) in SaaS is calculated by taking your Average Revenue Per User (ARPU) and dividing it by your Monthly Churn Rate.
What is a good churn rate for SaaS?
A good monthly churn rate for a B2B SaaS company is typically under 3%. For enterprise-level SaaS, it should be under 1%.