Is the traditional LTV formula giving you misleading results when you have multi-year SaaS contracts?
In episode #321, Ben Murray unpacks a listener’s question about how Lifetime Value (LTV) should be calculated when customers sign multi-year agreements. Using real-world finance and accounting logic, he breaks down how multi-year contracts can inflate your aggregate revenue retention (GRR) and distort LTV:CAC ratios — and how to fix it.
You’ll learn when to adjust your LTV calculation to use cohort retention, renewal rate, or aggregate GRR, depending on your business model and contract structure. The Retention Triangle!
What You’ll Learn:
- The correct LTV formula for SaaS
- Why multi-year contracts can artificially boost retention and lifetime value.
- When to use aggregate GRR, renewal rate, or cohort retention in your LTV calculation.
- How to interpret the “triangle of retention”: aggregate, renewal, and cohort retention.
- Why LTV is a point-in-time metric, not a cumulative one.
- How to explain your retention assumptions clearly during due diligence or a fundraising process.
Why It Matters:
- For SaaS CFOs & Finance Teams: Using the wrong retention assumption can lead to overestimated LTV:CAC ratios, poor financial modeling, and investor skepticism.
- For Founders & Operators: Understanding how contract length impacts SaaS economics helps you make better pricing and renewal decisions.
- For Investors & Buyers: Accurate LTV and retention analysis provide confidence in the predictability of future revenue.
- For Accounting Leaders: Aligning your LTV calculation with your revenue recognition and retention tracking ensures accurate SaaS reporting.
Resources Mentioned:
No Fluff Series – The SaaS Academy: https://www.thesaasacademy.com/pl/2148384654
Quote from Ben:
“Multi-year contracts can make your LTV look great — until investors realize it’s inflated by locked-in customers. That’s why understanding retention dynamics is critical.”
