Nearly all start-ups fail due to a lack of client retention and a lack of ability to attract new ones. Client lifetime value (CLV) – or projected net profit due to a long-term connection with a customer – is low for companies with a high “churn” rate and low “acquisition” rate, respectively.
The Customer Lifetime Value (CLV) is a critical SaaS metric to monitor in order to assess your business model’s potential. Although this is the case, many marketers are still unsure of what the word means and how to use it productively in their marketing campaigns.
Here, we’ll explore customer lifetime value in detail and give suggestions on how to improve your CLV and expand your SaaS company.
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What is the lifetime value of a customer?
Client lifetime value informs you of how important each customer is to your SaaS business, and it is calculated not only on the basis of individual purchases, but also throughout the course of their whole connection with you and your organization. Customer lifetime value (CLTV) or lifetime value of a customer (LTV) are other terms for the same thing.
When a client joins up with you for nine months, this is an example of customer lifetime value (CLV) for a software business. Their lifetime worth will be determined by the amount of money they pay throughout that period.
Why client lifetime value is so important in software as a service
For subscription-based companies, knowing your CLV is critical. Developing new client acquisition tactics and increasing customer retention rates while preserving profitability will be easier with this information.
CLV is critical in SaaS because of these reasons:
It’s a reliable indicator of a company’s long-term success.
Positive indicators for your company include a high gross margin, a strong cash flow, and a healthy overall revenue. A high client lifetime value, on the other hand, shows that your product and market fit are excellent.
It demonstrates that your consumers are loyal to your brand and that your SaaS product is connecting with them. This may assist you in making long-term predictions about the performance of your business.
It offers information on the costs associated with acquiring new customers.
If you don’t know how much money a client brings in, you won’t know how much to spend on recruiting them.
When it comes to recruiting new clients, SaaS firms spend five to seven times as much as they do on keeping their current ones.
It’s possible that the expenses of acquiring a client will be more than the value of the first transaction they make. However, the money you make from the same client may be worth far more than the money you spent on acquiring them in the first place. When you compute the CLV, you get a clear picture of the situation’s reality.
It generates information that may be utilized to support marketing activities
You’ll be able to keep your most lucrative clients and find new methods to earn money from the ones you don’t value as much once you know how much your consumers are spending with you.
It aids in sustaining growth
CLV enables SaaS companies keep tabs on their progress and make adjustments as needed.
How long does it take a SaaS client to pay back their initial investment?
The average income a customer produces over a given time (monthly/quarterly/annually) may be multiplied by the average subscription duration to arrive at LTV for SaaS businesses.
Customers’ Long-Term Value Formula for SaaS Services
SaaS has a clear client lifetime value. In other words, it’s the amount of money you make from a client throughout the course of their relationship with your firm, less the costs of acquiring and keeping their business.
This is how the formula works:
LTV is LTV=ARPU (average revenue per user)/Revenue or Customer Churn
Let’s consider the key performance indicators (KPIs) that go into this calculation.
Churn Rate
This SaaS statistic shows you how many clients you’re losing each month. A company’s churn rate measures how many consumers discontinue using your products or services in a particular period of time as a percentage of the total number of customers. Customer churn is the polar opposite of brand loyalty.
Customer churn rate is calculated as follows:
Churn rate = Churned customers/Total initial customers
You must multiply the turnover rate by 100 to get the percentage.
If you have 100 clients and lose 10 while gaining 5, your churn rate is 10%, for example, you’ve had a bad month. (10/100)
Reduce client turnover by creating content that is relevant to your audience’s wants and requirements. To get started, call or email Seologic agency now.
Average Revenue Per User (ARPU/ARPA)
A company’s lifetime value (LTV) is calculated using ARPU and the churn rate for subscription-based services. Monthly or monthly recurring revenue (MRR) is the most common billing cycle for SaaS businesses.
The lifetime value (LTV) of a SaaS customer is the total amount they will pay over the course of their relationship with the business.
If all of this is too confusing, you may use this LTV calculator to calculate your LTV.
When it comes to SaaS businesses, what does a satisfied client mean?
Annual subscription income is the lifeblood of every SaaS business. As a result, the CAC (customer acquisition cost) must be lower than the CLV (customer lifetime value) of a subscription of this kind. If you don’t, your company will start to lose money (as happens in most startups).
These metrics are important for SaaS providers to keep in mind:
Customers should have a higher lifetime value (LTV) than the cost of customer acquisition (CAC).
When it comes to a sustainable SaaS business, the CAC should be three times the company’s annual sales to be considered. Large, well-established firms like Salesforce.com have CAC multiples of around 5 times.
Recuperation of CAC takes less than a year.
CAC recovery should take no more than a year. If you don’t, you’ll find that expanding your company will cost you too much money.
Lifetime Value of SaaS Products
When it comes to customer lifetime value (CLV), consumers who use your goods for an extended period of time are more valuable to your business. You can count on them to stick around, but only if you provide them reasons to appreciate your products and services as they grow in value.
You must constantly provide value to clients at all phases of their customer lifetime if you want to increase your CLV and expand your company.
- Streamline and improve the customer onboarding process
The best time to enhance CLV is during onboarding. The sooner your consumers see the worth of your goods, the sooner they’ll realize that you’re a wise investment for them.
- Make things simple and quick when onboarding new employees.
- Include video tutorials, guided product tours, and other resources.
- Personalize the experience and gather information about the user in advance.
- Perform A/B testing using SaaS technologies to improve the onboarding process
- Talk to long-term consumers who have a high perceived value.
Customers with a high lifetime value have shown satisfaction with your goods, so you know they’ll return. They may, however, offer ideas on how to make your service better in some areas. Find out what makes your product or service stand out from the competition, and use that information to attract new consumers.
- Analyze each target segment’s lifetime value
Use customer success tools to segment and prioritize current customers based on their customer profiles to identify possible issues that may lead to customer turnover.
- Reduce overall turnover as much as possible
Reduce churn by tracking and reviewing data on a regular basis. This will allow you to identify issues early on. Set churn rate targets using KPIs.
Check to see whether your website is easy to navigate for your consumers. Tutorials and analytics monitoring features may help your product get traction by encouraging people to use it. Take proactive measures to increase the number of renewals you get.
- Invest in product education channels
When building your support infrastructure, be sure to include a knowledge base that includes self-service articles, video instructions, tutorials, and other types of material. Even though putting them together will take some time, the end result will be worthwhile.
- Multimodal customer service should be considered
You need to be on as many channels as possible if you’re a SaaS company. Customers are likely to possess several devices and communicate with you through at least three distinct channels. Investigate the most popular distribution methods used by your target market. After that, make certain that employees are taught how to use such systems.
- Develop long-term connections with and loyalty from your customers.
Building long-term connections with your customers is key to your company’s success. Communicate with consumers on a daily basis so they know you’re interested in whatever they say.
Conduct NPS (net promoter score) research by sending out questionnaires to your customers. Happy consumers are more inclined to subscribe for a longer period of time, which means higher CLV.
- Enhance average revenue per user
Increasing your CLV is as simple as upselling and cross-selling. Upselling is the practice of persuading consumers to purchase a more costly item or service. For a SaaS business, this could include assisting a client in making the switch from a cheaper to a more costly plan. Customers may be cross-sold products or services that are comparable or complimentary.
Conclusion
To calculate and manage client lifetime values, businesses face many obstacles. In-house knowledge, CLV calculation expenses, and difficulty of managing these variables are a few of the challenges. Another is receiving proper consumer data.
For a SaaS company to be successful, these obstacles must be overcome since knowing your CLV is important for expansion.
Marketing firms that specialize in SaaS products may be a huge asset when it comes to determining and monitoring the appropriate growth indicators.
Contact the experts at Seologic and schedule a free 30-minute consultation for ideas and experience in measuring key KPIs.