customer lifetime

How to Calculate Customer Lifetime Value for SaaS Companies

Ben Crouch

In this article

Every business (and every founder for that matter) worth their salt grapples with their value-added. Whether they’re providing the value that a customer needs and expects, and whether they’re doing all that they can to ensure customer retention and prevent the loss of customers to competitors. But value works both ways. B2B SaaS companies also need to be able to calculate how much value (or revenue and gross margin) the customer brings to them throughout their lifetime as a customer. And that’s especially true in the increasingly competitive world of B2B SaaS.

Calculating Customer Lifetime Value from the day of sign-up to the day the customer churns is a critical metric that has a knock-on effect on every aspect of the financial health of your business. But how do businesses calculate this key metric? And what are the key levers to increase it? Join us as we dive deep into one of the most important metrics in the SaaS industry.

 

Section 1:

What is Customer Lifetime Value (CLTV)?

In its simplest terms, Customer Lifetime Value (CLTV) is the amount your business can reasonably expect from a customer account throughout their journey. In the world of SaaS this will typically be based on their monthly subscriptions up to the point of churn. It will also include any additional extras, add-ons, upsells or fluctuations in pricing tiers. 

It is used to help predict the net profit of your whole relationship with the customer. Needless to say, it is also tied to your retention and churn rates- the metrics by which SaaS companies live or die.

When you have a high CLTV it’s typically because a customer sees value in your product and your brand. They stay with you for longer and are more likely to either upscale their subscription or use add-ons. So when your CLTV is high and your churn rates are low it’s a strong indicator that your business is in good shape. What’s more, measuring your CLTV against the costs of customer acquisition will give you a good idea of how long it takes to recover the costs of each new customer and how quickly they become profitable.

It really is the metric that keeps on giving!

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Even if your CLTV is lower than you’d like or expect, you can implement strategies to improve it. The one thing you absolutely can’t afford to do is bury your head in the sand. Which is why here we’ll look into how you can calculate and indeed boost your CLTV.

 

Section 2:

How do you calculate CLTV?

Calculating CLTV is, in principle, pretty straightforward. Especially if you use a monthly subscription model. More flexible subscription plans, freemium models and feature-based services can muddy the waters slightly, but the principle remains the same. 

To calculate CLTV  you need to calculate the average value of their purchases. This is then multiplied by the frequency rate of their purchases. This gives you your customer value within a given time period. To calculate CLTV all you need to do is multiply this by the average customer lifespan. 

Unsure how to calculate these metrics? No sweat, we’ve outlined the formulas below:

 

Customer Value
CV = Average Purchase Value / No. of Orders

 

Average Purchase Value
APV = Total Revenue / No. of Orders

 

Average Purchase Frequency Rate
APFR = No. of Purchases / No. of Customers


Average Customer Lifespan
ACL = Sum of Customer Lifespans / Number of Customers


Customer Lifetime Value
CLTV = Customer Value x Average Customer Lifespan

Once you have this figure you see how well your customer support and customer success teams are doing their job. You can even cross-reference CLTV with your marketing channels and see which referrals generate the best CLTV. If your scores reveal a deficit between CLTV and Cost Per Acquisition you are well-positioned to take steps to enhance your CLTV. Even if you’re happy with your figures, that’s no reason to rest on your laurels.   

 

Section 3:

How can you enhance CLTV?

This begs the question of how you go about enhancing your Customer Lifetime Value. There are a number of useful strategies which can help you to refine your operational practices. By giving the most value to your customers you’ll be able to get the most value back from them in return. There are many different ways in which you can do this, but here are some of the most effective;

Keep collecting (and acting upon) feedback

Wondering how your customers really feel about your product? Worried that their current tier isn’t meeting their needs? Paranoid that they’re a hair’s breadth away from jumping ship and using your competitor’s product?

Here’s a novel way to relieve yourself of doubt… talk to them.

SaaS companies should actively encourage feedback from their users to ensure that they’re consistently delivering value and identify opportunities for the customer success team to rectify any doubts or concerns experienced by users. 

Customer feedback is like any data, it’s only as useful as the actions you take as a direct result of it. If you show that you’re quick to act on customer feedback you’re more likely to garner their loyalty, thereby improving your CLTV. 

Streamline your on-boarding process

Users want a simple and hassle-free on-boarding that gets them up and running as soon as possible. This is especially true for B2B users for whom time is money and a lengthy on-boarding can start to eat into their profitability. 

Poor on-boarding accounts for almost 25% of customer churn, so yours needs to be infallible to ensure satisfaction for new users and keep your CLTV high.

Some ways in which you can improve your on-boarding process might be:

  • Use data collected in the signup form to use personalisation in the on-boarding process, helping the user to feel more at ease and attentive.
  • Use infographics, guided tours, videos and interactive animations to demystify the on-boarding process and even lay out the learning curve.
  • A/B test different variations of the on-boarding process to find out which is faster and / or more conducive to customer retention.
  • Broadly speaking- keep it swift, simple and satisfying. 

Rethink your approach to email marketing

Email is the bread and butter of SaaS marketing, but if you’re to get the most out of your emails and ensure a greater CLTV you’re going to need to rethink your approach to email marketing. Generic cold emails aren’t going to cut the mustard if you hope to improve Customer Lifetime Value. Your emails need to help customers perceive the value in your product while also pre-empting and allaying their concerns or objections about your product or pricing. 

Some useful tips for generating better drip emails include:

 

  • Make sure you personalise as much as possible
  • Use a voice of authority like that of the company director or founder
  • Share case studies of how existing customers have used your product to improve their operations.
  • Display or link to reviews to leverage social proof
  • Link to your resources or blogs which give them insight into the product’s capabilities and how they can implement it. 

This can help you to increase acquisition and retention and ensure that your users get the most out of your product. 

Offer outstanding customer support

Finally, your busy B2B customers will require outstanding omni-channel support when they need it if they’re to get the most value out of your product and brand. Leave no stone unturned in ensuring that your users always have somewhere to turn when they need help and guidance. Over the phone and live chat support are extremely important, as are email and social media support. If users need support outside office hours, they should at the very least have access to a chatbot which can help them with some troubleshooting or flag the matter for a member of your team to follow through on the next day. 

Knowing your CLTV and taking active steps to improve it can help you to deliver greater value and keep you one step ahead of the competition.

Interview with a founder of a SaaS company

Originally published on 20/02/20 07:06

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