Is the LTV formula flawed when you introduce multi-year contracts into your SaaS pricing model? In this episode of SaaS Metrics School, Ben Murray, The SaaS CFO, tackles a powerful and nuanced question from the community—one that often comes up during investor due diligence and advanced SaaS financial analysis.
Lifetime Value (LTV) is one of the most widely used SaaS metrics, but it’s also one of the most misunderstood—especially when contract structures start to evolve. If your company offers multi-year contracts, you may be unintentionally distorting your retention metrics and, in turn, your LTV calculations. That can lead to misleading signals for both operators and investors.
In this session, Ben breaks down how LTV is typically calculated using a point-in-time approach. This includes taking subscription ARR, adjusting for subscription gross margin, and dividing by churn—specifically using one minus Gross Revenue Retention (GRR). While this formula is widely accepted, the real question is whether it still holds up when customers are locked into longer-term agreements.
Multi-year contracts can create the illusion of strong retention because customers are contractually committed, even if their underlying engagement or satisfaction may not reflect that. This becomes especially relevant in due diligence, where investors may question whether your retention metrics are artificially inflated. If you’ve recently signed a large number of multi-year deals, your aggregate revenue retention may look impressive—but is it truly representative?
That’s where a deeper understanding of retention metrics comes into play. Ben introduces the concept of the “triangle of retention,” a framework that includes aggregate revenue retention, renewal rate, and cohort retention. Each of these provides a different lens into customer behavior and long-term value creation.
Aggregate revenue retention gives you a broad, historical view of how revenue is retained across your entire customer base. Renewal rate, on the other hand, focuses on customers who are up for renewal in a given period—offering a more immediate and actionable signal. Cohort retention allows you to track specific groups of customers over time, helping you identify patterns and determine when retention stabilizes.
One of the key insights from this episode is the importance of identifying that stabilization point within your cohorts. Whether it’s 6, 12, 18, or 24 months, understanding when customers “stick” can dramatically improve the accuracy of your LTV calculations. By comparing cohort-based GRR at that stabilization point with your aggregate GRR and renewal rates, you can validate whether your current LTV assumptions are truly reflective of your business.
This is where advanced SaaS metrics become incredibly powerful. Instead of relying on a single metric, you begin to triangulate insights across multiple data points. This not only strengthens your internal decision-making but also prepares you for investor scrutiny and due diligence processes.
Ben also emphasizes the importance of using consistent units in your calculations—favoring dollar-based churn over customer churn when calculating LTV. This ensures alignment between your numerator and denominator, leading to more accurate and meaningful results.
Ultimately, LTV is not necessarily flawed—but it can be misleading if not contextualized properly. Multi-year contracts don’t break the formula, but they do require a more thoughtful approach to retention analysis. By leveraging the triangle of retention and understanding the nuances of your customer base, you can build a more reliable and defensible LTV model.
If you’re a SaaS founder, operator, or finance leader looking to level up your metrics and better understand the drivers of valuation, this episode is packed with actionable insights. From retention frameworks to due diligence readiness, you’ll walk away with a clearer perspective on how to measure and communicate the true value of your business.
Tune in and take your SaaS metrics knowledge to the next level.
📌 More Resources from Ben Murray – The SaaS CFO:
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