When you are running a SaaS business, there are different metrics you need to keep track of. These metrics help you align your business strategies into the right direction. Without these metrics you would have no accountability of your business and keeping the growth in check would become difficult, let alone taking the corrective measures. Out of all the metrics we use in SaaS, we are going to discuss one very important metric called Customer Lifetime Value (CLV) in this article.
In a subscription based business, wouldn’t it be great if you know in advance for how long a customer would stay with you in business? Imagine the benefits of knowing in advance the revenue they would generate within this period. This would give you a clear picture of all the budgeting and other expenses you can afford to make while still keeping your profit margin wide. This is an information which every SaaS business would cherish and the metric that strives to give this information is what we call Customer Lifetime Value.
Although it is not a constant value that would stay true forever, it is the best possible estimate which companies make about their revenue from a customer. In simple words, CLV is an estimated revenue generated by a customer during their entire relationship with a business before they leave it for good. It starts from the first time they purchase the product, then extends to their subscription renewal fees to the various other upselling and cross-selling revenues they generate for a company.
CLV in SaaS vs CLV in other business
CLV is specially important in SaaS business because it is a long-term involvement you need to keep with your customer. For any other kind of business, it is not of much importance because the transaction is all about just one-time purchase of the product. For example, purchasing a Television. So, in that scenario, the cost price of the product boils down to the CLV and that’s it. The relationship is mostly considered to be terminated after that. The marketing tactics and business model is totally different for this kind of transaction. They need to focus only on the quantity of purchase through their customers for their business growth.
What differentiates SaaS from the above mentioned business is that, here in SaaS, you need to also focus on the quality aspect of customer relationship. You need to maximize the customer’s entire duration of being in business with your company. Hence, to achieve that there are lots of other factors that are brought into play. That’s what makes customer success an integral part of a SaaS business.
The customer lifetime value helps you in decision making in various areas of business. The most obvious one is to know how much you can spend on acquiring a new customer. The marketing and advertising costs are one of the biggest woes for any business. Hence, you need to calculate the exact cost that you can afford to lure new customers into your business.
Through CLV you can know at which point you can break even the acquisition cost. And from there on, how much more can you afford on serving each customer versus the ROI they are generating. If you have been researching the SaaS industry for some time, you would have already known that acquiring a new customer is five times more expensive than retaining an existing one.
So, through CLV, you can easily plan the budget between customer acquisition and retention.
How to calculate CLV?
To calculate the customer lifetime value, you must calculate the following.
- Average Purchase Value: You can calculate this by dividing the total revenue of your company by the total number of purchases in a given period.
- Average Purchase frequency rate: This is calculated from dividing the total number of purchases that happened in a period by the total number of unique customers who bought the product in the same period.
- Customer value: To calculate this, multiply the average purchase value by the average purchase frequency rate.
- Average customer lifespan: This is calculated by averaging the number of years a customer continues to purchase from your business.
- CLV: Finally, multiply the Customer Value with the Average Customer Lifespan to get the CLV. This is the revenue you can expect from a customer to generate on an average over the period of their entire relationship with your company.
Best ways to use CLV
Apart from the already mentioned benefits of CLV in the above sections, there are a few more best ways to use it to enhance your business strategies.
Fine tune your business
Since you already know how to calculate the CLV through the above section, it is basically the multiple of three components – Purchase value, Purchase Frequency and Customer Lifespan.
So, to increase the CLV you need to look at each of these components individually and try to increase them. Each of these components demands different strategies for you to implement.
For example, to increase the purchase value, you need to create higher-end products with more enriched features. Purchase frequency would need to market your products effectively to you existing customers. While the customer lifespan component needs you to bring in the relationship management qualities to implement.
Know your target audience
You can also use CLV to know your target audience for further marketing efforts. Through your existing customer base, you can identify which are the ideal ones who are generating your CLV. Basically, your top performing customer segment. Then through customer profiling you can check all their demographic details. This way, you would know that these are the attributes for your ideal customers. Then, you can simply target your advertising to the audience of similar profiles.
Finally: How to increase Customer Lifetime Value
The most direct way to increase CLV is through customer retention. The longer they stay subscribed to your service, the higher revenue would they generate. So, the tips to increase customer lifetime value basically boils down to the tips of customer retention. But here I would like to point out further unique points that you can implement.
Promote Annual Subscription
Encouraging your customers to buy an annual subscription would be the best way to increase CLV. This will give you an extra mile in product adoption and provide value through your service. This is mostly helpful for the customers who have spent initial months or a year with high satisfaction.
Approach customers for upselling and cross-selling
Apart from what they already spend on subscriptions, your efforts should be targeted towards upselling and cross-selling other products to them. This is a clear way of revenue expansion and mostly applies to the customers who are more loyal to your brand and have a high Net Promoter Score.
One thing that will keep your customer stuck to your brand is through quality in service. You must ensure that your quality in serving them is far better than your competitors. This will keep them stay longer in your business and would also give them confidence in trying out your new products and spend further on them.