SaaS Metrics School

Should Expansion Revenue Be Included or Excluded From LTV

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In episode #333, Ben answers a foundational SaaS metrics question: Should expansion revenue be included in your Lifetime Value (LTV) calculation? Ben walks through the correct LTV formula and highlights how misalignment between LTV and CAC can distort your LTV:CAC ratio. He also covers when expansion should be included.

The episode provides a practical framework for SaaS founders, CFOs, and operators to ensure they calculate LTV accurately, compare it properly to CAC, and model unit economics using consistent, reliable inputs.

Key Topics Covered

  • The correct LTV formula using average new-customer MRR × subscription gross margin
  • Why the churn input should align with dollar-based metrics using 1 – Gross Revenue Retention (GRR)
  • Why expansion revenue is deliberately excluded from LTV in most SaaS models
  • How including expansion artificially inflates the LTV:CAC ratio
  • The cost mismatch between acquiring new customers (CAC) and generating expansion revenue
  • When PLG motions justify including limited, time-bound expansion revenue in LTV
  • How organic upgrades differ from sales-assisted expansion
  • How SaaS+ businesses must adjust their LTV formula to account for usage revenue
  • The role of gross margin in determining true unit economics
  • The importance of aligning metric definitions when evaluating customer profitability

    • Why This Matters

    This episode is essential for:

    • SaaS founders calculating LTV for budgeting, pricing, and forecasting
    • CFOs, controllers, and FP&A leaders managing unit economics and CAC payback
    • Finance teams modelling customer profitability and revenue expansion
    • Operators working in PLG environments assessing organic expansion patterns
    • Investors reviewing LTV:CAC ratios in diligence and portfolio monitoring
    • Anyone building SaaS Plus (subscription + usage) revenue models

      • Resources Mentioned

      Ben’s deep dive on SaaS+ LTV: https://www.thesaascfo.com/how-to-calculate-ltv-with-variable-revenue/

      SaaS Metrics course: https://www.thesaasacademy.com/the-saas-metrics-foundation

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      SaaS Metrics SchoolBy Ben Murray
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