What is LTV SaaS?
Customer Lifetime Value, or CLV, is a metric that determines the amount of profit you make from each customer. The purpose of this metric is to assess the financial value of your customers and see how much they contribute on average.
Customer lifetime value is important because it helps you make decisions about how to spend your resources. Click To Tweet
For example, marketing and customer support are costly, but if the company can keep a single customer for decades, those expenses will be more than paid off.
- How much should I spend to acquire a customer?
- Who are my best customers? How can I offer products and services tailored for them?
- How much should I spend to service and retain a customer?
- What types of customers should sales reps spend the most time on?
How to compute LTV SaaS?
When measuring lifetime value for a subscription business, we need to take into account three variables:
- ARPA (Average Revenue per Account);
- Gross margin.
The lifetime value of a customer is calculated by taking the revenue they bring in minus what it costs to serve them. The result is how long your company can continue profiting from that one customer before churning.
Lifetime Value or LTV SaaS formula is calculated by multiplying Average Revenue Per Account, or ARPA, with the Gross Margin. This calculation is then multiplied by the percentage churn rate to get LTV.
Your customer lifetime value is an excellent way to understand the health of your business. Click To Tweet
For this metric to be accurate, you need customers paying more than they cost and staying with you longer.
Some sources may refer to this calculation as CP (Customers Profitability) instead of LTV calculation SaaS, which is short for Lifetime Value.
Customer profit, according to Marketing Dictionary is, “The difference between the revenues earned from and the costs associated with a customer relationship during a specified period.”
In some cases, people will calculate lifetime value by calculating how much it would cost them if they lost that person right now.