SaaS Customer Lifetime Value
Definition of CLV
We can define CLV as an average value company expects from a single customer during their subscription time. In other words:
- CLV = estimated profit from 1 customer
Importance of CLV for SaaS businesses
Customer lifetime value for SaaS businesses is important for several reasons.
First, you need to compare your CLV with Customer Acquisition Cost (CAC). SaaS companies need to have at least 3x higher revenue from CLV than the cost of CAC. Needless to say, if your CAC is equal or higher than CLV your company financial is plummeting fast towards bankruptcy.
Second with proper measurement of CLV you can easily detect what features and channels are bringing the most revenue. With that crucial piece of information, you can act quickly by pouring additional budget, time, and energy to them. Vice versa, you need to “stop bleeding” by cutting the budget on those less effective features and channels.
Not all customers are equally contributing to the CLV of the SaaS company. With the proper calculation of CLV, you can spot what customers are the most valuable to you. Similarly to the features, you will then work to keep those customers loyal and long-term.
Additionally, CLV is a part of SaaS metrics for investors to see and based on them to draw conclusions on how profitable SaaS companies are.
Properly analyzing and understanding your CLV gives you a clear picture of how much profit you can expect from a particular customer and then, according to that, you can adjust your marketing budget properly.
So to summarize the importance of CLV:
- CLV need to be at least 3x higher than CAC
- With CLV you can detect your most profitable channels and features
- With CLV you can spot your most valuable customers
Now that We know what SaaS CLV is and why you should care about it, it’s time to see how to calculate it.
How to calculate SaaS customer lifetime value?
Even though the definition and importance of CLV are pretty easy and straightforward to understand, the calculation is a bit more complicated. It is a tricky task because customer lifetime value benchmarks are various depending on different factors. That leads to several methods of SaaS lifetime value calculations.
The simplest way includes only two SaaS metrics: Average revenue per account (ARPA) and Customer Churn Rate (CCR).
ARPA is pretty self-explanatory, so We will briefly explain the second part of the equation. CCR represents a speed at which rate you are losing your customers (churn rate). Both metrics need to be measured in the same time frame (ARPA and CCR are usually measured monthly).
- CLV = ARPA/CCR
It is worthy of note to say the number you get this way is not a precise one. CCR never happens linearly, instead churn rate usually happens at various speed rates. The most common ones are increasing, constant, cliff, and evenly over the time churn rate. As a SaaS company, you need to avoid cliff churn rates at all costs. It means that the % of cancelations happen in the first few mounts, leaving you with a too-small customer base for your business to be profitable.
SaaS Customer Lifetime Value (CLV) is one of many crucial metrics that need to be properly analyzed and understood in order for SaaS businesses to succeed.