As a SaaS company, one of the most important metrics to track
Your overall churn can be reduced
You’ll see that the customer LTV formula is a function of two things.
- How much money your customers spend on you.
- How long your customers stay .
the longer you keep your customers paying you, then the greater your chances of increasing your
we need to consider user churn times in order to do this. How long can customers stay with your company before they cancel?
First, you need to determine if your customer churn rate is high. Our Benchmark is a great way to compare
Benchmarks will help you see how your metrics compare with companies with similar
- Raising your prices
- Expansion revenue
It is important to note where you are in the benchmarks for customer LTV and user churn. If
Understanding and analysing
What is the customer’s
? lifetime value
CLTV is the total worth of a customer to a business over the entire period of their relationship. It takes into consideration the total revenue one single customer can bring in and compares it to the company’s expected CLTV customer lifetime.
The longer a customer stays loyal to a company and continues to make a purchase, the bigger
customer lifetime worth (CLTV) refers to the amount that a customer will spend on
your product/service throughout the relationship.
This metric will help you focus on the long-term benefit of repeat business, rather than transaction-based thinking.
The customer’s LTV would be $1,000.
your LTV may be higher or lower than you think
If you are a SaaS startup in its early stages, and still trying to get to Product/Market Fit, and If you are doing your first experiments to convert leads, don’t worry about
This is because your LTV determines how much money
The simplest way to Calculate LTV for a subscription business is ( customer lifetime x gross profit). Here, customer lifetime is ( 1/ customer churn rate) and gross profit is (
Here’s how a CLTV formula works. If
This formula should calculate gross profit based on the ARPA (AKA “Average sales price” or ASP) of your new customers. Account expansions are already included in your revenue churn rate.
These formulas can be a good starting point, provided you remember a few basics.
- I’ve seen LTV calculations that were based solely on revenue, rather than gross profit. This is absurd. Use gross profit.
- When determining
, don’t mix monthly and annual plans. This is common for SMB SaaS. This is especially important rate your churn If yourcompany is young and growing quickly. This is because the number you add to your annual plan customers is greater than the number of customers who are due for renewal. Therefore, your monthly churn rate across all customers is reduced by the customers who cannot cancel (1). both monthly and annual plans, calculate each segment’s LTV separately. If you have a wide ACV range, such as customers paying you $3000 per month while others pay you $100 per month, it doesn’t make sense to Calculate the average LTV across your entire customer base. Instead, estimate If you have your LTV for each segment of yourcustomers.
A (luxury) problem is caused by negative churn
However, the simple LTV formulas are not without their limitations. Negative
The problem is that with perpetually negative revenue churn, the revenue stream for a customer cohort would continue to grow and become more valuable over time, which is clearly not possible. David Skok’s excellent article “What is your TRUE customer lifetime worth?” explains how this formula should be extended to include negative churn values.
The full article is highly recommended. But the gist of it is that
- Customer turnover of, say 10% annually.
- Your remaining customers’ spending will grow by 22% per annum, based on the original contract amount.
The trick is to assume positive customer churn rates (which makes sense since customer churn cannot be below zero and almost always above zero),
This solves the problem of the simple formula. Previously, negative revenue churn was synonymous with infinite, exponential revenue growth.
Smiling cohort charts?
If churn doesn’t spread linearly over a customer’s lifetime, the classical formulas may not be applicable. In simpler terms, let’s say that in the first month of a customer’s lifetime, you lose 5% MRR to churn. Month 2 will see another 5%, month 3 will see another 3%, and month 4 will see
Poor onboarding, signing up non-ICP customers or customers who see the first month as a paid trial can all contribute to a high churn rate within a customer cohort. This is not a common pattern in SMB SaaS.
Consumer subscription companies tend to experience a greater impact. Mr. Consumer Sub Nico Wittenborn noted that consumer subscription companies typically lose between 50-60% and 10-15% of their subscribers within the first year. These companies can still be great businesses if the 30-35% who survive the first two years are loyal customers for a long time.
This is because you care more about those customers that stay with you for a few months than about the ones who leave after a few months. It makes sense to look at it this way. The corollary to a tightened customer definition will be that your CACs will rise because you’ll divide sales and marketing spending by a smaller number, but it could be a better reflection on the reality of your business.
(2)This works well if there is a significant drop-off in the first few months followed by a steady churn rate for the remainder of the customer’s lifetime. It doesn’t work well if
Interview customers who have the highest
To identify customers with a
you want to learn more:
- your product should be the most valuable to them.
- How they use your product.
- What attracted them initially to you \(and what they learned about you)?
- How they have grown with your product from the moment they signed up.
- Any other insights that will help you understand why they are here.
First, find out your average LTV. I’ll grab yours from the Metrics dashboard.
Next, go to your customer list. You’ll need to create a few filters:
- Active customer It is best to speak to customers who are active. It can be awkward to reach out to people who have canceled.
- LTV Filter to show customers with LTVs that are higher than the average (in our case, it was higher than $3443)
You should now have a list with your highest LTV customers.
Here’s an example of how your email might look:
Subject: first name, your company hand picked you!
Hi first name,
Thank you for being a loyal customer of your company! I’m interested in learning more about customers and your product. Since you’re such a great customer, I was wondering how you could help me?
Would you be willing to spend 15 minutes answering a few questions or making a quick call? We’ll give you 10% off your next bill in exchange for your time.
We look forward to hearing from you soon!
Include a link to schedule a call with Calendly or Doodle. This makes it super easy for them to set it all up.
Start collecting feedback and organizing it in a spreadsheet.
Maybe they use a particular feature of your product. Because customers get the most value out of that feature,