Decision-makers are transitioning from short-sighted, transactional approaches to a more sustainable and customer-centric model.
61% of organizations consider increasing overall customer lifetime value as their top marketing goal. This data signifies a fundamental shift in how SaaS businesses perceive success. Rather than focusing solely on customer acquisition, they acknowledge the need to nurture and retain their existing user base.
Customer Lifetime Value (CLV) can help you realign your resources and efforts toward creating lasting value for your loyal customers. In this in-depth guide, you’ll learn the concepts of CLV, its benefits, how to calculate it, and actionable steps to improve it for long-term success.
- Customer Lifetime Value (CLV) is a SaaS metric that forecasts a user’s long-term profitability. It takes into account their purchase frequency, spending habits, and length of engagement with your products or services.
- There are basic and detailed methods to calculate CLV. Either way, a high CLV offers three major benefits: boosting referrals, ensuring stable cash flows, and increasing resilience to market fluctuations.
- To improve CLV, SaaS businesses can focus on five key strategies: enhancing the customer experience, building strong customer relationships, facilitating effective communication, offering value-added services/products, and implementing retention strategies.
What Is Customer Lifetime Value?
Customer Lifetime Value (CLV or CLTV) is the predictive metric that quantifies a SaaS customer’s long-term profitability. It factors how often they buy or use your products, how much they spend, and how long they stick around.
Knowing each user’s value in the long run is crucial for shaping your marketing strategy. Using these insights can help you tailor your marketing budget to different customer segments.
Let’s say you run a subscription-based productivity software with two user segments: large enterprises (Segment A) and startup clients (Segment B). Your CLV shows that Segment A has greater purchase frequency, average order value, and long-term interactions than Segment B.
You can consider Segment A your high-value customers. You receive stable, significant revenue from these well-established organizations that have been purchasing your premium packages for years. With historical data to back it up, you can tailor your budget allocation and incentivize Segment A’s loyalty to maximize its value further.
In Segment B’s case, it may be better to focus on acquisition strategies (e.g., extended free trial periods or upgrade discounts) to nurture their potential. This approach helps increase CLV without overspending on generic campaigns that may not resonate with early-stage companies.
We’ve barely even scratched the surface. This is only a quick peek into how CLV can influence your business decisions. Now, let’s dig into how a boosted CLV benefits SaaS businesses in terms of brand success and financial growth.
3 Benefits of High Customer Lifetime Value
A high CLV indicates that your user base is a reliable revenue source. Understanding how this important metric benefits your business is the key to realizing its full potential.
Here are three reasons you must start paying close attention to boosting your CLV.
1. CLV boosts referrals and positive word-of-mouth
Healthy CLV ratings often signify happy, long-term users. 94% of these loyal customers would recommend their incredible experiences to family and peers.
You generate referrals and foster positive word-of-mouth without spending a dime on marketing. For 78% of organizations, these referrals are very or extremely valuable compared to leads generated from other campaigns.
Optimizing your CLV is a cost-effective growth strategy. Instead of spreading your resources thin, invest in retention-focused marketing efforts to capitalize on your existing user base’s goodwill.
2. CLV ensures stable cash flows
Higher CLV translates to longer customer lifespans and more predictable revenues. If users stick with you in the long run, you can count on reliable cash flows.
The popular streaming platform Netflix is a prime example. The company reported $9.406 billion in operating cash flow for the fiscal year ending June 30, 2023—a 199.86% increase year-over-year. This steady and substantial cash flow implies Netflix’s strong customer loyalty and the ability to maintain a high CLV.
Numerous long-term subscribers with increased lifetime value are a consistent source of liquid funds. They can offer you the flexibility and financial security to make more strategic investments.
3. CLV increases market fluctuation resilience
Tackling market downturns becomes a top priority for executives determined to identify and retain at-risk customers. Churn rates can soar as high as 30% annually in global markets. To navigate through these uncertainties, decision-makers can turn to metrics like CLV.
CLV doesn’t guarantee 0% churn in absolute terms. But it equips you with a strategic framework to maximize revenue from loyal customers. It helps you develop retention-centric strategies to nurture strong client relationships despite your limited resources, such as regular check-ins and personalized offers.
In a nutshell, these three benefits can help protect your profit margins and secure the bottom line. Here’s a step-by-step guide on calculating customer lifetime value.
How to Calculate Customer Lifetime Value
Precision is key in any SaaS metric. Let’s get the data requirements straight before we jump into the numbers. Once we have those down, we’ll break down the formula and demonstrate how to apply it in real-world scenarios.
Data required for calculation
To calculate CLV, you’ll need customer data related to their product usage, spending patterns, and service tenure. These crucial data points are essential for accurate calculations. Below, we detail how to collect and utilize each of these elements.
- Average Purchase Frequency. This metric measures how often a customer purchases your offerings. Follow the steps to gather this data:
- Select a time frame. Determine the specific timeframe you want to analyze. This could be a month, quarter, or year, depending on your objectives.
- Count transactions. Count the total number of transactions made by a particular user during the timeframe. These include every instance where they make a purchase.
- Calculate average. Divide the total number of transactions by the number of customers included in your analysis.
APF = Total Number of Transactions / Number of Customers
To illustrate: You find one of your customer segments made a total of 1,200 transactions within a year. There were 100 users in that segment. The APF would be:
APF = 1,200 transactions / 100 customers = 12 transactions per customer per year
- Average Purchase Value. APV is the mean amount of money spent by a customer in a single transaction. You can obtain it through the following formula:
APV = Total Revenue* / Total Number of Transactions
*Total Revenue is the gross margin, whether from online orders, in-store purchases, or any other sales channel during a specific period
Continuing the example above, let’s say you generated a gross margin of $24,000 from all purchases. Using the formula above, you’ll get:
APV = $24,000 (Total Revenue) / 1,200 = $20 per transaction
- Average Customer Lifespan. The average duration existing customers stay loyal to your brand. For simplicity, let’s say your ACL extends to five years.
ACL = Average Number of Years a Customer Stays Active / Total Number of Customers
So we’ve discovered that this segment makes an average of 12 transactions per client annually, with an APV of $20 for each. The users remained with your brand for an average of five years. With these figures in hand, we can calculate your CLV.
Customer lifetime value formula
CLV predicts how much net profit a customer will generate over their lifecycle. The quickest, no-frills method is to multiply all three factors we discussed above. Your CLV then is $2000 using the basic method.
Basic CLV = (Average Purchase Value × Average Purchase Frequency × Average Customer Lifespan)
Basic CLV = $20 × 12 × 5 = $1200
However, recognizing profit margin, discount, and retention rates yields a more accurate calculation. This well-detailed method estimates each customer’s net profit potential—i.e., all profits after deducting expenses.
Detailed CLV = Average Gross Margin* × (Retention % / (1 + Discount % – Retention %))
*Average Gross Margin = (APV × APF × Profit Margin %) × ACL
Let’s say profit margin, discount, and retention rates are 40%, 10%, and 60%, respectively. Now, plug in the values we have:
Average Gross Margin = (APV × APF × Profit Margin %) × ACL
= ($20 × 12 × 0.40) × 5
Detailed CLV = $480 × (0.60 / (1 + 0.10 – 0.60))
= $480 × (0.90 / 0.50)
= $480 × (0.45)
You can compute your CLV one way or the other, but it’s always advisable to do both.
Pro-tip: Customer lifetime value calculation alone can’t guarantee the whole picture. Analyze CLV alongside other metrics, particularly your customer acquisition cost (CAC).
Is your CLV high, but your CAC is still higher? It could mean your lead generation and marketing expenses are eating into your profits. This situation can be unsustainable in the long term, so it’s crucial to implement effective and holistic CLV improvement strategies.
5 Strategies For Improving Customer Lifetime Value
SaaS success hinges on understanding the lifetime value of a customer. Check out these five proven strategies to increase CLV while bolstering your company’s growth and profitability.
1. Enhancing the customer experience
85% of B2B buyers consider customer experience as important as a brand’s products or services. However, SaaS products often deliver their real value over time. It’s up to you to set the stage for your user base to recognize your software capabilities from the get-go.
The key to higher CLV is to observe and listen to your customers. Evaluate the customer journey across all touchpoints. Once you’ve identified these areas, use the following strategies to address deficiencies and improve your CLV.
- Onboarding. Here’s where new customers experience your product for the first time. Ensure customers get off to a strong start by providing clear, step-by-step tutorials and helpful resources.
- Training & Education. SaaS products constantly evolve with new features, updates, and improvements. Training allows users to stay current with these changes. Help them leverage new functionalities through webinars, video tutorials, or up-to-date knowledge bases.
- Ongoing Customer Support. Users will encounter questions or issues along the way. Address these concerns promptly via responsive support channels like email, social media, or phone. The more options available, the better.
- Feedback Collection. Surveys and interviews can provide invaluable insights into your users’ pain points and preferences. Asking for their input can help you make customer-centric software improvements that align with their needs.
By plugging any experience-degrading gaps, you ensure a journey that exceeds customer expectations.
2. Building strong customer relationships
Customers who redeem personalized offers spend 4.5 times more annually than those who haven’t taken advantage of such offers. This increased spending raises the average purchase value, which in turn drives up CLV.
This shows how building strong customer relationships directly increases customer lifetime value. You know your users so well; they trust you—it’s a win-win scenario.
But it’s not enough that you only know your user base to personalize interactions and foster such relationships. Consider using CRM integrations like Salesforce and HubSpot to send tailored recommendations, offers, and content that resonate with individual users. Doing so can help customers feel valued and understood, leading to higher spending.
If you have the funds, customer loyalty programs are worthwhile investments. Loyalty programs incentivize customers to keep coming back. You can offer points, discounts, or exclusive access for repeat purchases or longer subscriptions to increase retention.
Incorporate these tools and incentives into your strategies. They’ll pay off in more referrals and longer engagement, keeping your CLV at an all-time high.
3. Facilitating effective communication
Poor communication has increased costs for 38% of business leaders, eroded brand reputation for 20%, and cost deals for 19%. That’s the last thing you want when improving CLV. What you need is effective communication that strengthens customer relationships, fosters loyalty, and mitigates churn.
Keep your patrons informed about new products, feature upgrades, and special offers through email newsletters or in-app notifications. In your SaaS/eCommerce platform, you can recommend products or services based on their past purchases.
In any case, choose quality over quantity. Don’t bombard users with irrelevant information. Tailor your communication to their preferences and behavior to boost customer retention rates and repeat purchases.
In times of crisis or when changes occur, maintain transparent communication. Explain the issue, its impact, and what your team is doing to resolve it. Skip the technical jargon or overly complex explanations. Open and honest communication creates a loyal customer base that stands with you through thick and thin.
4. Offering value-added services or products
Value enhancement increases a customer’s chance of repurchases and renewals by 82%. They’re more likely to stick around longer, spend more, and recommend your brand to others. This way, value-added offerings create a positive feedback loop that increases CLV and solidifies your market position.
Brainstorm product development ideas to enhance customer satisfaction. For instance, offer multilingual content and interfaces if your product has a global user base. Failing to provide such value may result in current customers seeking alternatives, leading to churn and diminished CLV.
Upselling and cross-selling are other value-adding techniques to increase CLV. Upselling encourages users to purchase a higher-tier product version, increasing their lifetime spend with your brand. Cross-selling, on the other hand, suggests complementary products (e.g., add-on plugins or integrations) on top of their initial purchase.
Identify product development, upselling, and cross-selling opportunities to increase customer’s average order value. Long-term users receive more value from these expanded offerings, and you, in turn, secure more lucrative customer relationships.
5. Implementing retention strategies
Retention helps SaaS companies grow 1.8 times faster than their competitors. To achieve such growth, implementing retention strategies takes a multi-faceted approach.
First off, segment customers. Identify high-value ones within your database by categorizing them based on their behavior, preferences, or purchase history. High-value customers typically contribute the most to CLV, so it’s essential to tailor strategies to their needs.
Based on these needs, create individualized experiences to recognize each user. Think Netflix’s to-watch recommendations based on a user’s viewing history or Salesforce CRM’s personalized dashboards and reporting. The more flexible and customizable, the more effective your efforts will be.
Now, these retention tactics also work well for retargeting campaigns to win back valuable customers and promoters (i.e., those who enthusiastically recommended your brand).
Analyze your churn rate at a granular level to recognize the signs that lead to customer attrition. Implement automated alerts or notifications that trigger when a user exhibits these churn predictors. One example is sending an email notification to a customer who hasn’t logged in for a certain number of days.
Pro-tip: Use subscription billing software like Stax Bill to monitor active customers’ LTV and reduce churn with automated dunning management. It sends payment reminders, reprocesses failed transactions, and tracks behavior patterns to prevent customer loss due to payment-related issues.
Calculating CLV to Future-Proof Your SaaS Business
Customer Lifetime Value is a metric that helps define your company’s sustainable profitability and growth. It allows you to make informed decisions on budget allocation, marketing strategies, and customer relationship management.
Strategizing around CLV not only maximizes your profits but also secures your competitive edge in the market. To boost your CLV ratings, enhance the customer experience, build strong customer relationships, facilitate effective communication, offer value-added services or products, and implement retention efforts.
A subscription-billing software like Stax Bill can help you monitor the LTV of your active customers and reduce churn with automated dunning management. Incorporate these practices into your business model, and watch your bottom line skyrocket. To learn more about Stax Bill and how it can help your business, contact us today.
FAQs about Customer Lifetime Value
Q: What is CLV?
Customer Lifetime Value is a useful metric that SaaS companies use to calculate the total revenue that a customer spends on their product/services during their entire lifetime of using it. It helps them analyze which customers provide the most value to their business so they can focus their efforts more on retaining them. This helps to boost a SaaS company’s profitability as it’s next to impossible to recover the costs of acquiring new customers from a one-off purchase.
Q: How often should a company re-evaluate its CLV?
The frequency at which a company should re-evaluate its CLV can vary based on several factors, including the nature of the business, the stability of its customer base, and the resources available for analysis. In general, quarterly or annual evaluations are common for many businesses.
However, for some, monthly or even daily tracking could be more appropriate. The key is to strike a balance between the benefits of having up-to-date insights and the resources required to conduct these assessments. Additionally, it’s important to ensure that you have a stable and consistent methodology for calculating CLV so that you can track changes over time accurately.
Q: Is CLV relevant for all types of businesses?
CLV is a valuable metric for many types of businesses, but its relevance can vary depending on the nature of the business and its goals. For example, CLV is highly relevant for retail and eCommerce businesses as they often have large customer bases. Understanding the long-term value of each customer helps in customer segmentation, personalized marketing, and optimizing customer acquisition costs.
For subscription-based businesses, knowing how long subscribers are likely to stay and how much revenue they will generate over time is crucial for growth and profitability. For B2B companies, especially in industries with long sales cycles, understanding the value of long-term relationships with clients helps in setting appropriate pricing, customer retention strategies, and sales and marketing efforts.
CLV can also help businesses in service industries, such as consulting, healthcare, and insurance, assess the value of retaining clients, cross-sell services, and improve customer satisfaction.
In summary, while CLV is highly relevant for many businesses, its importance can vary based on the business model, customer base, and strategic goals. Each business needs to evaluate whether CLV analysis aligns with its objectives and resources.
Q: Why is CLV important for SaaS businesses?
CLV is vital for SaaS businesses as it drives revenue optimization through targeted marketing and retention strategies. It emphasizes customer retention over acquisition, reducing churn and maximizing customer subscription periods. This insight can guide resource allocation, pricing strategies, and product development to align with your high CLV customers.
Efficient marketing, enabled by CLV data, will help to enhance ROI. SaaS companies leveraging CLV can gain a competitive edge by outperforming competitors in customer retention and profitability, securing long-term success.
Q: How do you calculate CLV for SaaS?
To calculate the Customer Lifetime Value (CLV) for your SaaS business, follow this formula:
CLV = (ARPU x Gross Margin Percentage) / Churn Rate
- Calculate Average Revenue Per User (ARPU), which is the average monthly revenue generated from a customer.
- Determine the Gross Margin Percentage, representing the portion of revenue remaining after covering variable costs.
- Calculate the Churn Rate, the rate at which customers leave your service.
By plugging these values into the formula, you can estimate the expected revenue a customer will generate during their lifetime with your SaaS product. Regularly reassess and refine these values to ensure accurate CLV calculations.