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March 10, 2022

If you’re wondering what is LTV in SaaS, you’re not alone. LTV stands for “lifetime value,” and it’s a key metric for SaaS companies.

Determining your company’s LTV is essential to understanding how much money you can afford to spend on acquiring new customers. Churn rate is one of the most important factors that determines a company’s LTV, so it’s important to understand what churn is and how to calculate it. In this

So, what is LTV in SaaS? Your CLTV is the predicted amount you will earn from a customer throughout the entire relationship. The idea is that this metric gets you away from short-term thinking and focusing on the longer term value of a customer.

For example, if you charge $100/month for your service and a customer stays with you for 12 months, their LTV would be $1,200.

This is a basic example and only accounts for a single customer. But that obviously isn’t practical for running your business (since you hopefully have more than one customer).

To calculate a customer’s lifetime value (LTV), you’ll need to know three pieces of information:

1. Churn rate: The number of customers who canceled within a given timeframe. Example: If you had 100 subscribers last year and lost 10, your churn rate is 10%.

2. Average Revenue Per User (ARPU): This is the average revenue of all your current accounts.

Or, MRR/total users. Example: If you have 100 accounts, and from 50 of them you made $50 per year, and from the other 50 you made $100 per year, then your ARPU is $75 yearly.

3. The length of time a customer remains active with your company on average: We’ll call this “Avg Customer Lifetime.” To find this number, divide the total amount of time customers have been subscribed by the number of customers who are still subscribed at any given point in time.

What is LTV in SaaS?

Now that we have all our data points calculated, we can plug them into this equation to determine LTV for each individual customer:

LTV = Avg Customer Lifetime * ARPU * (1 – Churn Rate)

Customer lifetime value formula

Customer lifetime value is a metric that measures the financial value of a customer over the entire period of their relationship with your company. It can be calculated using two different formulas:

LTV = ARPU (average monthly recurring revenue per user) ? Customer Lifetime

or

LTV = ARPU / User Churn

Churn variance and sample size

Input: The churn variance and sample size are important factors to consider when measuring the success of a business. The churn rate can be messy, so it’s important to multiply results by a discount rate. Additionally, sample size is also crucial for obtaining accurate data.

If you have less than 100 users or fewer than 1,000 users in your calculations, your data may not be scientifically valid.

Customer acquisition cost and lifetime value

If you’re a SaaS business, then it’s important to know your customer’s lifetime value (LTV). This is because it will help you determine how much you can spend to acquire new customers. For example, if your customer acquisition cost (CAC) is $100 and that same customer has an LTV of $500, then you’re making a profit of $400.

The higher your LTV and the lower your CAC, the faster your business will grow. You may be overspending on customer acquisition if your LTV/CAC is not above 3.

LTV and Churn

If you’re looking at your LTV and churn, you’ll likely find that they differ greatly between your different pricing plans. This is because users on your lowest-priced plans are also more likely to churn than those on other plans.

How to increase customer lifetime value

Knowing your average customer lifetime value is a critical piece of information for any business. However, just looking at a number on a graph won’t help you grow your business. In order to use this data to its full potential, you need to employ tactics that will improve your LTV.

what is ltv in saas

Interview your customers with the highest lifetime value

It would be really helpful to speak with your customers who have a high lifetime value. This will give you an idea of the value they are getting from your product and why they stick around.  and how they get the most value from your product.

Subject:Hi {first name},

{your company} handpicked you!

Thank you for being a long-time customer of ours, {first name}. We are constantly trying to learn more about how our customers use our product and we value your feedback. That’s why I’m reaching out to see if you would be interested in participating in a quick call with me?

In exchange for your time, we will take 10% off your next bill. You can grab a time on my calendar here.

I hope to hear from you soon!

Interview your customers with the highest lifetime value to see how they use your product and what features are most valuable to them. This information can help you develop and market your product more effectively.

Compare lifetime value by customer segment

When examining your company’s Lifetime Value (LTV) as a whole, it is important to remember that not all customers are the same. You need to understand the LTV of each major customer segment in order to identify trends and take actions accordingly.

For SaaS companies, this usually means breaking down LTV by price point. As you can see in the example below from Baremetrics, customers on lower-priced plans tend to churn more and generate less revenue than those on higher-priced plans. Therefore, it may be worth your time to focus on acquiring mid-large sized customers if possible.

– you can also use location, acquisition source when they signed up and other criteria depending on your business. By analyzing data such as this, you can begin to identify which customer segments have the highest LTV and work towards getting more customers like them.

Reduce your overall churn

If you’re looking to reduce your churn rate, it’s important to take a look at how long your customers are staying with you. Are they canceling after a short amount of time? Benchmarks can help you compare your metrics to similar companies and see where you fall.

what is ltv in saas

If your churn rate is high, work on finding ways to keep customers around longer.

Increase your ARPU

The second part of the lifetime value equation is revenue per user. As you know, churn is inevitable, so you can’t rely solely on reducing that percentage.

You need to figure out how to make more money with your customers. Customers who pay less tend to have a lower LTV than those who pay more, so it’s important to keep pricing in mind when growing your business.

There are two main ways to increase ARPU: Raising your prices or expanding revenue through things like upgrading customers to higher priced plans, cross-selling complementary products, and offering add-ons. If you’re interested in learning more (and I highly suggest you do), I wrote an entire guide about customer expansion which can be found here.

Set a customer lifetime value goal

It can be helpful to set a goal for your customer lifetime value. This number can help you measure how successful you are in retaining and growing your customer base. Looking at your historical numbers, if you want to increase your LTV by 50% in the next two months, that may not be very reasonable.

what is ltv in saas

But if you want to get it up 10% each month, that is more achievable.

Why Should You Care About Customer Lifetime Value? 

Customer Lifetime Value is a powerful metric that can help businesses understand the value of their customers and how to best align their sales, marketing, and product management processes. This can benefit customers by increasing net profits, and it also becomes possible for companies to measure ROI for every new customer. CLTV can be accurately estimated with the help of LTV in order to figure out commissions that can be offered to your sales team.

Customer Profitability:

LTV, or “Customer Lifetime Value,” is a calculation that estimates how much revenue a customer will generate over the course of their relationship with your company. It takes into account both the revenues earned from and the costs associated with the customer.

LTV: CAC Ratio

what is ltv in saas

NetSuite’s Ron Gill recommends that your SaaS business should have an LTV: CAC ratio of 3 or higher in order to be successful. This metric is important to track over time to make sure you’re driving improvement. Keep in mind that this guideline assumes you have a Gross Margin of 80% or higher.

Months to recover CAC

In order to measure the health of your SaaS business, it is important to track four key metrics: Months to Recover CAC, Growth Rate for Net New ARR, Burn Rate, and NRR. If you can maintain healthy values for these metrics, you will know that your company is on solid ground.

One of the most important indicators of a healthy SaaS business is how quickly you can recover your CAC – or the amount of capital you burn in order to acquire a new customer. Ideally, this number should be less than 12 months. However, in today’s market, it is possible to raise larger sums of capital and therefore have a longer time frame to recover CAC. Click To Tweet

If you’re a small SaaS company, focus on simplicity when calculating LTV. Don’t take the easy way out, but don’t spend months trying to find the answer because it’s just a part of a bigger machine that needs to make you money.

You can collect more customer data as your business grows and that will help you more accurate forecast your LTV.

Conclusion

What is LTV in SaaS? Hopefully by now you’ve learned that lifetime value (LTV) is a key metric for SaaS companies, and determining your company’s LTV is essential to understanding how much money you can afford to spend on acquiring new customers.

Churn rate is one of the most important factors that determines a company’s LTV, so it’s important to understand what churn is and how to calculate it as well.

 

 

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