As an owner of a SaaS business, you have to track various metrics to check the progress of your firm, such as customer lifetime value, churn rate, acquisition costs, net revenue, etc. Customer lifetime value or CLTV is the most tricky of all.
Understanding and calculating it can be confusing as it involves tracking different KPIs and complex procedures. Moreover, if you manage to calculate customer lifetime value, you may not be able to understand whether it’s good or bad. Don’t worry! We are here to help you. In this guide, we will tell you what LTV is, how to calculate it, and effective strategies to boost it.
What is Customer Lifetime Value (CLTV)
Customer lifetime is the duration of the relationship between customers and your business. The estimated amount a customer spends on your products or services throughout this period is called customer lifetime value. It’s a measure of how much revenue a customer is expected to bring to your company throughout the relationship. It helps you understand the long-term value of each customer.
For instance, if you charge $100/month for your services and a customer gets them and stays for a year, the LTV will be $1200. You have to balance it with other metrics such as customer acquisition cost or CAC. It’s the amount you spend on acquiring new customers. If CLTV is much higher than the acquisition cost, it means your investment in getting new customers is paying off well.
A Guide to Calculate CLTV
The aforementioned example is about calculating the lifetime value of a single customer. However, it’s not applicable in actuality as you will have multiple customers. Therefore, you need to know how to practically measure it for your business. To do so, you need to understand and calculate two additional metrics. These are:
Churn Rate
It’s the most painful metric for any business as it indicates the number of customers who stop using your services over a certain period. Simply put, it’s the percentage of customers who are not willing to pay you for the services.
For example, if you had 60 customers last year, and lost 6 of them, the churn rate will be 10%.
Average Revenue Per User (ARPU)
It’s a key metric used to measure the average revenue generated per user or customer over a specific period. It helps you understand the average income your business is making from each user. It’s critical for assessing financial performance and growth potential.
For example, If you have 200 customers and make $1000 per year from 100 of them and $200 0 per year from the other 50, then your ARPU is $1500 yearly.
Calculating Customer Lifetime Value -TV Formula
You can calculate CLTV using customer acquisition cost. The formula would be:
LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime
Apart from that, you can also calculate it using the churn rate. The formula for this calculation will be:
LTV = ARPU / User Churn
There’s an inverse relation between LTV and churn rate. If the churn rate is higher, the lifetime value will be low, and vice versa. It means the churn rate is as important as LTV.
You don’t need to calculate customer lifetime value manually as you can use Baremetrics for this purpose. It’s a reliable tool to track and analyze your LTV growth over time.
Effective Strategies to Increase CLTV
Only knowing the average LTV value isn’t enough for your business. Consider increasing it by adopting effective strategies. The best things you can do regarding this are:
Interviewing Customers with High LTV
The first thing you need to do is to shortlist customers with the highest LTV and arrange an interview with them. You can offer discounts to agree on the maximum number of customers for the interview. Schedule interviews according to their routines. During the interview, you must ask questions about the features they like in your product the most, the channels from where they heard about you, and why they use your services or products.
After conducting interviews, you have to gather and analyze data to find trends. For instance, if most high LTV customers are coming through a single channel, you can invest more in it to get more similar customers. It will ultimately increase LTV.
Reducing Churn Rate
Customer lifetime value has an inverse relation with churn rate. Reducing the churn rate will increase LTV. You need to check how long you can keep customers around and make them pay for your products or services. Once you calculate the churn rate, you need to determine whether it’s low or high. To do so, you can leverage Baremetrics. It enables you to compare your churn rate with other companies by Benchmark. If your churn rate is higher than others, it’s a problem and you should put efforts into controlling it.
Boost Average Revenue Per User
ARPU directly influences the LTV. Only reducing churn will not help in boosting LTV. You have to focus on improving revenue per user as well. To do so, you can either increase costs or expand revenues.
Increasing prices can be sensitive for some businesses. However, setting extremely low prices can also obstruct the growth of your firm. Your products must be priced based on their quality and the value they add.
Expanding revenues is a less risky task. You can do so by increasing your customer base. Cross-selling complementary products can also help. Apart from that, you can ask customers to upgrade to higher plans by offering attractive packages.
Set Goals
Setting goals can motivate you to increase LTV, especially if you love moving forward and achieving something. Having clear objectives enables you to develop robust strategies to achieve them. Make sure you analyze your business and market trends to set realistic goals. It will help you gradually uplift your CLTV.
Bottom Line
To sum it up, LTV isn’t a regular SaaS metric. It offers insight into your business, telling how your products or services are priced and the value they are offering to customers. Get a free trial of Baremetrics now to understand, analyze, and improve your LTV.
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