18 July 2020
What is Customer Lifetime Value (CLTV)?
Customer Lifetime Value, also known as Lifetime Value (CLTV), is the amount of money a customer will spend on a SaaS product or service over their lifetime or the entirety of a SaaS business. CLTV gets at the heart of marketing's objective to attract and keep profitable customers. You need to understand CLTV to put together effective marketing plans and make strategic decisions.
How much money are you going to allocate to attract new customers and generate leads? CLTV will help you understand how much money you need to spend on customer acquisition and retention because attracting new customers for SaaS products or services might cost three or four times as much as retaining existing ones.
An average SaaS company loses around 10% of customers each year. In this article, we will show you how to lower your customer churn rate with the help of Customer Lifetime Value (CLTV).
How to Calculate Customer Lifetime Value (CLTV)?
CLTV is one of the essential SaaS metrics every organization, big or small, measures today. CLTV helps understand that if a SaaS business is healthy and growing or at risk of churn and closure. To measure Customer Lifetime Value (CLTV), you need details of positive and negative revenues and CAC (Customer Acquisition Cost).
• Positive Revenue: All actual and potential revenue generated from sales of SaaS products or services.
• Negative Revenues: Possible loss of revenue as a result of customer defecting before the expected lifetime.
• CAC: Customer Acquisition Cost is the total marketing expenses that are used for acquiring a new customer.
Once you have got the data of positive and negative revenues and CAC, you can calculate the CLTV using the simple formula below:
| CLTV = Average Revenue Per Customer – Total Expenses
Here are some of the other data using which you calculate the Customer Lifetime Value (CLTV)
1. Non-recurring costs
2. Discount rate
3. Average order value
4. Purchase frequency
5. Customer business duration
6. Running expenditures
As long as your SaaS Customer Lifetime Value (CLTV) is higher than your Customer Acquisition Cost (CAC), you will be in a good position.
Here’s the second formula to calculate CLTV easily:
| CLTV = (Average Value of Sale) x (Number of Repeat Transactions) x (Average Retention Time)
Calculation Method Breakdown:
A. (Average Value of Sale) = $30.50
B. (Number of Repeat Transactions Per Year) = 1.34
C. (Average Retention Time) = 2 years
Lifetime Value of your Customer = ($30.50) x (1.34) x (2) = $81.74
$81.74 is how much revenue you will receive from each customer over their subscription duration.
When is Customer Lifetime Value (CLTV) Used?
The most common use of Customer Lifetime Value is in customer acquisition and customer relationship management. The ultimate goal of using CLTV in a SaaS business is to acquire and retain customers for the long term.
For customer acquisition, CLTV is used to identify the acquisition cost and calculate cost per acquisition channel. Customer relationship management is used to maximize customer value over time and determine which promotions to provide to which customer segment.
Customer Lifetime Value (CLTV) models are based on several calculations, such as:
1. Sales History (Frequency and Timing)
2. Future Revenue (Upsell-Cross-Sell)
3. Churn Modeling
4. Cost Elements
5. Lifetime
Always make sure that your Customer Acquisition Cost (CAC) must be lower than your Customer’s Lifetime Value (CLTV). If your business CAC is higher than CLTV, then that means your business is losing money and dying a slow death. The ideal CLTV to CAC ratio, across SaaS industries, is 3:1.
Benefits of Using Customer Lifetime Value (CLTV) in a SaaS Business
Customer Lifetime Value (CLTV) shows how much profit your customers will generate during their relationship with your company. It also shows how healthy your customer base is and how likely your company will grow in the future.
The CLTV is a significant KPI (Key Performance Indicator) for a SaaS business that can be used to make decisions about sales, marketing, product development, and customer support. The CLTV KPI is the key to identifying the most profitable type of customers for your business and the ones that will bring more revenues in the future.
Some of the other benefits of using Customer Lifetime Value in a SaaS business are: -
• CLTV can help you decide how much you need to spend on Customer Acquisition Cost (CAC).
• CLTV can help you determine the right customer acquisition channels where you can spend more and gain more customers.
• CLTV can help a SaaS business in segmenting the right profile of the customers.
• CLTV can help a SaaS business in calculating resources depending upon the value of a new customer.
• CLTV can support you design loyalty campaigns and promotions that benefit those customers who bring prosperity to your SaaS business.
• CLTV helps measure how good your relationship expertise is with your customers, and therefore which metric you need to implement for potential new customers.
• CLTV can act as a criterion for future growth and expansion of a SaaS Company.
• CLTV can be the propulsion behind improving client relationships throughout the client life cycle and accelerating your SaaS business growth.
How to Increase Customer Lifetime Value (CLTV) for a SaaS Business
Some of the best ways to increase Customer Lifetime Value for a SaaS business are:
1. Grow the Average Order Value
2. Grow the Repeat Transaction Average
3. Grow the Retention Period
These are three straightforward ways to boost CLTV. Another best approach is to test what strategies work well with your SaaS business and include those strategies in your marketing campaigns. Make sure you are not ignoring the old customers in the desire of the new ones.
Try to use as many promotional channels as possible and stick with those that work well with your SaaS business. Some of the best SaaS promotional channels are SaaS review websites, SaaS business listing websites, email marketing, Software listing websites, Google Ads, LinkedIn Ads, and Search Engine Optimization.
Final Thoughts
Customer Lifetime Value (CLTV) is one of the most critical KPI metrics for a SaaS business that can help its growth. Make sure to calculate your CLTV, monitor it regularly, and use different CLTV formulas to calculate revenue. Plan with other strategies such as Customer Acquisition Cost (CAC), and keep evaluating your strategy until you find the perfect system that will make your SaaS business grow more.
