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March 11, 2022

If your SaaS company is interested in calculating customer lifetime value SaaS (CLV), then you need to be familiar with the steps involved. CLV is the revenue that a customer can expect to generate over the course of their relationship with you. Knowing how to calculate customer lifetime values SaaS (CLV) will help you determine if a potential customer is worth your time and what amount you can make from them.

For SaaS businesses, CLTV is one of the key metrics that need to be tracked. It gives you a clear indication as to how to calculate lifetime value Saas help your customer base and can help determine what percentage of customers are worth keeping in order for maximum profit.

Considering CLTV and analyzing the data can help SaaS businesses in developing a strategy to acquire new customers. The information also helps maintain profit margins by making sure that high-value, low churn rate clients are not lost.

how to calculate customer lifetime value saas

How to calculate customer lifetime value Saas

CLV is a metric used to calculate the total value of a customer over the entire period of their relationship with your business. It takes into account expansions, all potential expansion revenue that customers could generate, and compares it to your company’s expected CLV.  

The longer a customer sticks with your company, the more likely they are to spend money. Once you reach that point where customers feel invested in your business and start referring their friends family members, then it’s time for some serious profit.

What is CLV?

If you charge $100 per Month for your service, and a customer stays with us for 12 months, their LTV is the total amount they have paid in those 12 months. In this case, it would be $1,200.

how to calculate customer lifetime value saas

Why knowing how to calculate customer lifetime value SaaS CLV is important

If you’re not already tracking CLV, it’s time to start. This metric can help businesses align their sales reps and marketing strategies in order to increase net profits for the company as well as the customers.

The input is about a company being able to measure CLTV with customer acquisition costs (CAC). This allows the company to estimate how much profit each new customer will generate.

If you want to pay your sales team more for closing deals, make sure that the CAC (customer acquisition cost) is not higher than one-third of LTV.

So, the LTV should be: 

Don’t use a 3x multiplier when it comes to LTV.

When you show your sales reps how much they are adding to the company’s bottom line, it not only boosts their morale but also makes them feel more motivated.  

LTV helps product managers understand the true value of their products and cash flows. It’s important to note that there are many factors affecting a customer’s LTV and it is not solely dependent on how much they spend or what their lifetime spending looks like, but also on whether those customers buy from you at all.

Role of CLV in marketing?

You can’t just rely on your current customers to buy from you again and again. It’s way more expensive, time-consuming, and less effective than spending the same amount of money acquiring new clients. Plus: 60% of those who come back are repeat buyers!

Marketing teams have a tough time deciding which leads to pursue, and often chase after people who don’t actually want the product. By quantifying LTV upfront, marketing can focus on targeting qualified prospects that are easier for them to acquire.

Now, you must compile a list with your most profitable customers.

LTV helps establish how much to spend on acquiring new customers and keeping current ones happy. Click To Tweet

Now, you must compile a list with your most profitable customers.

It would be much easier to allocate funds for an experienced Saas marketing agency that can create great campaign results with CLV.

How do you boost your CLV?

Now, you must compile a list with your most profitable customers.

Without taking any action, your KPIs are useless.

Get calculating: how to calculate customer lifetime value, Saas

The CLTV is something that all businesses should calculate, but it can be tricky to figure out the right way. In this article, we’ll cover two methods: one straightforward and another more advanced method for getting a more accurate CLTV.

The basic calculation for CLV

Now, you must compile a list with your most profitable customers.

  • The basic value: Calculate the average revenue per purchase to get a sense of how much each customer spends on your products or services.
  • How frequent they buy: Now you can measure customer loyalty with this handy formula! All that is needed to do is divide the total number of purchases by the number of unique customers who made those same purchases.
  • The CL (customer lifetime): Want to know the value of a customer over their lifetime. In order to do this, we need three things: how much they spend on one purchase, what percentage of customers will buy again, and for how long they’ll keep buying.

how to calculate customer lifetime value saas

Take feedback or a short survey from your customers for CLV

If you want to make sure your customers stay loyal, it’s important that they’re satisfied with their current experience.

To start, identify the customers who are worth more than your average and learn as much about them.

  • Get the most from the product
  • How useful is the product
  • What attracted them to the product
  • How the product helped them to grow and become part of their life
  • Another reason that is keeping them stick to the brand

Let’s take a look at our LTV from the metrics dashboard.

The next step is to filter your customer list. This will help us determine what type of customers we are looking for.

  • Loyal customer: When reaching out to customers, it’s important to target those who are most active and engaged. Reaching out to people who have canceled their service could be a little awkward.
  • LTV: Only show customers who have an LTV higher than the average.

Now, you must compile a list with your most profitable customers.

If you want to know more about how they use the product/market fit, go ahead and reach out. They’ll be happy to answer any questions that you have!

One way to create a follow-up email is as follows:

Hi {first name},

Thank you for being a loyal customer of your company! I am interested in learning more about the use of your product by our customers. You have been an outstanding customer and I was curious if you would be willing to help. Would you be willing to take 15 minutes to give me a quick call and answer a few questions.

We’ll give you 10% off your next bill in exchange for your time. You can get a time slot on my calendar by clicking the link>. We hope to hear from each of you soon!

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You don’t have to offer discount rates or freebies, but the more incentives you can provide for them to do your interview, the better.

When scheduling calls, be sure to include a link for the other person to schedule their time. That way it’s simple and easy for them!

To improve the LTV of your other customers, start by gathering feedback and organizing it in a spreadsheet. Look for trends that you can use to increase their loyalty.

Let’s say you notice that most of your customers came from a specific channel. If this is the case, then it makes sense to invest more in those channels.

You might have just found the most popular feature of your product by talking to customers. You can focus on that and start marketing it more so people will see how great this is.

how to calculate customer lifetime value saas

How comparing lifetime value by customer segment would be advantageous?

If you’re looking at your LTV, it’s really hard to get a sense of what is happening. You need to break the numbers down into smaller groups so that you can find trends.

It’s a common misconception that all customers are the same. In reality, some are more important than others.

For SaaS companies, you need to know the Lifetime Value of each customer segment. This can be calculated by considering how much revenue they bring in over their lifetime with your product service or calculating an average transaction value for a certain group.

Joe on your $30/mo plan is likely to have a much lower LTV than Sally on your $200/mo plan. This is because customers who are spending more money are typically more valuable to businesses.

In Baremetrics, you can see your LTV by plan level.

It’s easy to see this trend. Our lowest plans have the worst LTV, despite having more customers than any other plan.

With our SaaS product, customers on lower-priced plans tend to churn rate more. We have found that they are less loyal and generate less revenue for us.

Now that we know the numbers, it’s clear to see that our time is worth investing in getting larger customers if possible.

Pricing plans are only one way to segment customers. You can create segments using Bare metrics based on location, acquisition sources, and a variety of other criteria.

We can compare the LTV of our US and Canadian customers to see if there are any differences.

As you can see, there are many different ways to slice and dice this data.

A common mistake is to focus on what people buy. But it’s better to find out which groups have the highest LTV and then try to get more customers like them.

How does all this work on the revenue churn rate?

There are two things you need to know about the CLTV formula: it’s a function of x and y.

  • The amount of money that customer spends
  • The duration or period they stay as customers

So, if you want to make more money in the long run, try not to lose any customers by offering incentives and great customer support.

What is your customer churn rate? How long do people stay with you before they cancel their subscription or product purchase and move on to a competitor?

Revenue churn rate is a major problem for all SaaS companies, but if you’re using Baremetrics and our Benchmark to see how your customer churn rate compares with other startups in the same industry, then it’s not as big of an issue.

Benchmarks are a great way to see how your metrics compare with other companies. For example, if you want to know what is the average revenue per user (ARPU) for an app like yours then benchmarks will show you. Click To Tweet

If you’re in the lower quartile for both user churn and CLTV, then it might be time to start thinking about how your retention is affecting your company.

how to calculate customer lifetime value saas

How to work on your ARPU? 

Now let’s discuss the second part of this equation: average revenue per user.

While churn is an unavoidable reality, you don’t want to rely solely on reducing that percentage. You also need to find ways to increase revenue per customer. As the example showed, customers who pay less tend to have a lower LTV than those who pay more.

In order to increase ARPU, there are two main ways:

  • Increase the price
  • Revenue growth

Pricing is a touchy subject for many founders. The reality of the situation, though, is that if you don’t raise your prices and instead keep them low in order to attract more customers – then you’ll be stunting your growth. Click To Tweet

If you are stuck in a rut and not seeing growth, then maybe it is time to start looking at your pricing. It’s never easy or straightforward when changing prices but if there has been no change for a while then this might be the answer.

With the second tactic, you need to work on getting more money from your existing customers. This is done by increasing their satisfaction with what they already have (either through better service or new product development) and then making sure that they feel appreciated.

  • Upgrade customers to higher-priced plans 
  • Try doing some cross-selling of products as complementary 
  • Makes pace for some add-ons to boost the subscriptions

Conclusion

We hope this article has helped you learn how to calculate customer lifetime value SaaS (CLV) for your company. CLV is an important metric that can help you determine the profitability of a potential customer and estimate the amount of money you can make from them.

Keep in mind that there are many factors to consider when calculating CLV, so be sure to take all of them into account when making your calculations.

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