The LTV of SaaS

We did research showing the typical SaaS company generates $0.57 of revenue per $1.00 of investment at the time they go public. At that level of annual revenue and assuming net dollar retention of 111% (in line with the median for public SaaS), the lifetime value of a SaaS customer is anywhere between $7 and $16 for each $1.00 of investment. If you can achieve those two metrics, $0.57 of revenue per $1.00 of investment and 111% net retention of customers on a dollar basis, you’re on your way to going public.

Why is it ok to generate less than $1 of revenue ($0.57) for each $1 invested? Because real SaaS revenue is recurring and as the data shows below, the typical SaaS business retains 111% of the prior year’s revenue when accounting for upgrades by existing customers, churn, and downgrades. The metric is known as dollar net retention and the specific formula is beginning of year revenue + upgrades from existing customers — churn — downgrades from existing customers, all in dollars of course, divided by beginning of year revenue. Hence if you started the year with $100 of existing revenue from current customers, churned $2, had $3 of downgrades, and $5 of upgrades from existing customers, your net dollar retention is 100%.

This paragraph is going to get very mathy, so my apologies in advance. At 111% net retention, you’re growing the existing customer base forever. Accounting for the time value of money, if you discount to today that perpetual cash flow by 15% to 20% doing a classic discounted cash flow analysis, the result is a lifetime value of the customer of $7.64 at a 20% discount rate and $16.02 at a 15% discount rate. The discount rate chosen is of course arbitrary, but the analysis is the same. Strive for earning $0.57 of revenue for each dollar invested and 111% net dollar retention each year. If you do that, as the table below shows, you’ll be in good company shortly.

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