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Is LTV Flawed with Multi-Year Contracts? | SaaS Metrics School | SaaS LTV

In a recent SaaS Metrics School episode, Ben Murray tackles whether the standard LTV calculation misrepresents value when a SaaS firm relies heavily on multi‑year contracts. He explains the conventional LTV formula—subscription ARR multiplied by subscription‑margin, divided by one minus gross‑revenue‑retention (GRR)—and why it is a point‑in‑time metric. Murray warns that multi‑year deals can artificially boost aggregate revenue retention, because customers are locked in and cannot churn until renewal. He recommends triangulating three retention lenses—aggregate GRR, renewal rate, and cohort‑based GRR—to detect such distortions. By tracking cohort GRR until it flattens (typically after 12‑24 months), firms can select a stable retention figure for LTV. “Think about your triangle of retention,” Murray says, urging operators to compare the latest renewal‑rate proxy against cohort and aggregate numbers. He cites due‑diligence scenarios where investors question inflated retention, and suggests that a consistent cohort GRR provides a more reliable LTV input than a single aggregate figure. Aligning retention metrics before fundraising or acquisition reduces valuation risk and improves internal forecasting. Companies that adopt a cohort‑focused LTV approach can present clearer growth narratives, negotiate better terms, and avoid surprises when contracts roll over.