As you track key SaaS metrics, are you using the customer lifetime value formula? To acquire and retain high-value SaaS users, you must know what the customer lifetime value formula is.
Customer lifetime value (CLV) is an essential SaaS metric that tells stakeholders how much revenue a typical customer will bring in during their relationship with your company. For a SaaS business, CLV represents a user’s value to your business over a period of time. Tracking CLV is vital to measuring and evaluating the sustainability of your SaaS business.
Venture capitalists and investors see CLV as the best metric for company valuation. If you’re committed to building an asset that’s attractive to investors, maximizing customer lifetime value must be at the forefront of your decision-making as a SaaS founder. Despite being essential to a subscription-based business model, many SaaS founders overlook the importance of CLV.
“Growth is not convoluted or magical. It’s very simple: Measure. Test. Experiment. Create a culture of experimentation and celebrate failure as much as you celebrate success.” – Chamath Palihapitiya
The customer lifetime value formula is critical to measuring the success of your SaaS business. Low user retention and lifetime value can have a detrimental impact on sustainability. Nothing is worse than having a user base that resembles a leaky bucket. If you’re suffering from high user churn, you must identify and address the hole in the leaky bucket for sustainable growth.
To know how to calculate customer lifetime value, you need to have a solid understanding of a few basic formulas:
Customer Lifetime Value = (Customer Value * Average Customer Lifespan)
Customer Value = (Average Purchase Value * Average Purchase Frequency Rate)
Average Purchase Value = (Total Revenue / Number Of Orders)
Average Purchase Frequency Rate = (Number Of Purchases / Number Of Customers)
Average Customer Lifespan = (Sum Of Customer Lifespans / Number Of Customers)
Here are just a few reasons why you should be using the customer lifetime value formula:
When you’re evaluating your product-market fit, CLV will tell you whether you’re effectively meeting the needs of your target market. If you have a high CLV, this is a very clear sign that you’re experiencing high customer retention - as the SaaS customers are continuing with their subscriptions. High customer retention can only be achieved through strong product-market fit.
In most cases, your customer lifetime value should be at least three times greater than your customer acquisition cost. If you’re spending $100 on marketing and sales efforts to acquire a new customer, this customer should have a lifetime value of at least $300. It all comes down to how much you’re investing to acquire customers in relation to what you will receive in return.
LTV/CAC Ratio = [(Revenue Per Customer - Direct Expenses Per Customer) / (1 – Customer Retention Rate)] / (Number Of Customers Acquired / Direct Marketing Spending)
The average churn rate for SaaS is anywhere between 5-7%. This is what you should be aiming for. Ideally, you don’t want to have any customers choosing to cancel their subscription - but it does happen. To effectively prepare for customer churn, you need to decide what an acceptable rate of churn looks like for your SaaS company and aim to keep churn below this figure.
While it’s inevitable that some users will call it a day and unsubscribe, you must do everything you can to keep your SaaS churn rate low. A high customer churn rate will be reflected in other SaaS metrics, such as customer lifetime value. If you can boost customer retention and get your churn rate under control, this will positively impact on your metrics across the board.
If you’re struggling with high customer churn, here are some tips to get you back on track:
If you’re trying to reduce churn, you should be leveraging a solution for collecting customer feedback. Raaft can help you to collect feedback and save customers with retention flows. At critical moments in the customer journey, Raaft can be automatically deployed to provide your customers with the information they need to unlock value from your SaaS.
Many SaaS founders see Raaft as their safety net. They know Raaft will automatically extend offers to customers in their retention flow. Raaft also provides founders with cancellation insights that makes it easy for customers to tell them why they’re deciding to leave. This data can prove to be invaluable for founders that are committed to making data-driven decisions.
To boost customer retention, you need to get the right systems in place to prevent churn and drive customer retention. Try Raaft for free today!
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