Customer Lifetime Value (CLV): Importance, Calculation And Improvement Strategies
When considering the progress path of your SaaS business, it’s important to go beyond just looking at return on investment. Subscription models rely heavily on recurring revenue, so keeping your customers for the long term is crucial. This is where Customer Lifetime Value (CLV) comes in. CLV is a crucial metric that provides more comprehensive information, compared to other figures, like ARPU (average revenue per user) and retention statistics.
For instance, the average revenue per user (ARPU) metric only provides details about what you charge a customer on average per month. What it doesn’t reveal is whether the customers are going to keep paying that amount for the long haul or not. Likewise, retention statistics also miss the complete story. While retention statistics can help you find if customers will stick with you or not, they miss the information on whether customers are paying each month.
This is certainly why CLV is a crucial thing to assess for businesses that manage subscriptions. It fills the gap between ARPU and retention, showing precise results on where your company stands in the market and the expected revenue throughout a customer’s lifespan. This blog is an in-depth look into the CLV metric and why it is crucial for businesses relying on subscription models.
What is Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV or CLTV) refers to the total revenue you can earn from a customer during the entire lifetime of their account. It measures the financial worth of a customer to your business throughout their engagement before they churn.
Simply, if a customer signs up for your product for a specific period, the amount he will pay during this period will indicate the lifetime value of that customer. For recurring billing with auto-renew, CLV also accounts for the ongoing revenue over time.
“In 2023, Apple subscriptions contributed over $10 billion in revenue per quarter, showcasing the immense impact of subscription services on customer lifetime value (CLV).”
Why is CLV Important for SaaS Businesses?
CLV is one of the most significant metrics to calculate for SaaS subscription model businesses. It can give a customer-centric stance to drive some critical marketing strategies related to your subscription model.
In fact, 25% of marketers include CLV in their top five marketing metrics.
Here are a few other factors adding to the essence of CLV:
- Evaluates Business Viability and Customer Loyalty
Knowing the customer lifetime value (CLV) helps you understand business sustainability and predict future revenue streams. A higher CLV indicates a sign of product/market fit and brand loyalty, showing how well your product or service resounds with your customers. Tracking CLV over time provides a valuable gauge of customer satisfaction and the overall health of your business in the marketplace.
- Clarifies Customer Acquisition Investment
CLV helps you determine how much to spend on acquiring customers. While the initial product/service purchase might not cover the acquisition costs, a customer can bring increased value to your business with repeated purchases. CLV provides a clear picture of the long-term value of customers. It helps you identify the most profitable features of your customers that can be used for marketing activities.
- Optimizes Marketing Strategies
Identifying CLV lets you pinpoint high-value customers for your business and focus on acquiring and retaining them effectively. Knowing customer spend helps tailor marketing campaigns and strategies to target those who can generate the most revenue. Also, you can allocate resources more efficiently, ensuring the highest ROI on your marketing measures. This strategic focus improves overall customer satisfaction and loyalty.
- Drives Consistent Business Growth
One of the major benefits of calculating CLV lies in its ability to identify customer behavior and predict future revenue streams. It helps refine product offerings and customer service practices, ensuring effective and data-driven growth strategies. This understanding can benefit you with more useful financial forecasting. Also, when you focus on higher CLV customers, it can drive more word-of-mouth referrals, strengthening your growth potential.
Customer Lifetime Value Formula for Calculation
Now, that we have understood the importance of CLV for SaaS businesses, let’s see how to calculate it next.
CLV can be calculated using the formula:
CLV = ARPU * Gross Margin * Average customer contract duration
or
CLV = ARPU / % Churn
Here,
ARPU is the Average Revenue Per User.
ARPU (monthly) = Total MRR/ Total Active Subscriptions (Users)
Gross Margin is the revenue after reducing the Cost of Goods Sold (COGS). Usually, it is expressed as a percentage of total revenue
Gross Margin (%) = (Revenue – COGS) / Revenue
Average Customer Contract Duration is the average value of customer subscription to your service or product.
% Churn is the rate at which your service/product loses customers.
What is a Good Customer Lifetime Value in SaaS?
CLV for SaaS businesses can vary depending on multiple factors. These include company size (Fortune 500 vs. freelance contractor), company industry, and customer type (B2B vs. consumer). A useful way to determine a good CLV in SaaS is to compare it with benchmarks of average customer lifetime in different markets. Then you can multiply the average customer lifetime (in months) by your monthly recurring revenue per customer.
For B2B businesses targeting small customers, the typical lifespan is 24 months. Here, a desirable lifespan would be 48 months or more. Enterprise SaaS companies often see a lifespan of 120 months, where something above 250 months is considerably good. In contrast, B2C SaaS companies usually have an average customer lifespan of 12 months, with those exceeding 24 months being considered good.
Factors Influencing CLV
- Price point
Do you provide a range of services at different price points to cater to a wider selection of customers? In that case, you need to manage subscriptions for different CLVs based on the product/service each customer subscribes to. With various subscription models, customers paying for low-tier services will have a different CLV than those on higher-tier plans. This affects the overall revenue and customer value assessments.
- Discounts
Providing discounts can have negative impacts on CLV in SaaS businesses. Discounting in SaaS can reduce CLV considerably. This happens because customers attracted by discounts tend to have a higher price sensitivity and a higher churn rate. The customers are often found to leave once the discount period ends, adversely impacting the overall profitability.
- Business model or product type
Is your service or product intended for long-term use? If your product or service is intended to fulfil a finite task, customers might drop off after that task completion. In that case, businesses should adjust their product offering or business model to prolong the average subscription duration. This can involve adding features or incentives that inspire customers to stay longer, improving their lifetime value.
- Billing model
Customers might expand or contract their product usage during the subscription period. For example, they can upgrade or downgrade a plan according to their requirements. These customer interactions with subscription models will fluctuate the CLV. To optimize, you can manage subscriptions more effectively and provide flexible subscription models tailored to different customer requirements.
- Customer segmentation
Segmenting your customers based on common traits like purchase history or location can help target marketing efforts but may not always yield the best results. CLV can improve the segmentation by helping you predict the total future value of customers to your company. This approach allows you to tailor marketing strategies to each individual or segment, optimizing efforts to improve their total lifetime value.
Strategies to Increase CLV for SaaS Businesses
- Upselling and Cross-Selling Opportunities
Upselling refers to selling product extensions or extra features to existing customers. On the other hand, cross-selling involves selling related products in addition to the core products. Both techniques help improve the CLV as they tighten customer relationships and drive more value. Also, it is less expensive to sell to an existing customer than to a new-born customer.
- Comprehensive Product Training
Comprehensive product training helps improve customer retention in the long haul. Customer churn can happen when customers don’t find the real value of the product or service you intended them to experience. Here is where product education, guided tutorials, and training can make a big difference in making them realize the value of your product. This makes customers hang on and thereby increases the lifetime value.
- Personalized Customer Interactions
Another way to improve CLV is to focus on personalization and an intuitive user interface. For example, you can incorporate customized invoices catering to individual customer requirements. Understanding customer preferences and personalizing interactions help you better identify upselling and cross-selling chances. Simple inclusions like personalized in-app messages can go a long way in making customers feel valued.
- Incorporate Retention-Boosting Features
Including special features that can make the customers stick to your service or product is something that you can count on next. A good example of such a feature is a custom dashboard that the customers can tailor with their data to enhance their business efficiency. These features help increase customer satisfaction, and at the same time, strengthen their engagement and facilitate ongoing use.
- Revise Your Value Proposition
To keep your customer relationship healthy, perform regular reviews and update your offerings based on the findings. Ensure your product or service adapts to changing market conditions and customer requirements.
You can look for feature adjustments, pricing changes, or even packaging changes to find what works well. Know your customer behaviour and use data to guide these changes. This can help ensure your offerings remain relevant and truly valuable.
- Exceptional Customer Support
Great customer support is essential for customer retention and satisfaction. For this, you can invest in early omnichannel support and make sure your team is trained and responsive. In a subscription model, sound customer support can be a key differentiator. This helps address issues promptly and build long-term connections. Outstanding support resolves problems quickly, and elevates overall customer experience, encouraging ongoing subscriptions.
Summing Up
In subscription-based businesses, a focus on customer lifetime value (CLV) is critical to success. It creates your strategies for customer success, product development, marketing, and pricing. By using the strategies outlined, you can increase CLV and ensure customer satisfaction. Happy customers increase revenue.
At saaslogic, we specialize in managing subscriptions and optimizing the subscription process to maximize your CLV. Our advanced tools and insights help businesses optimize their subscriptions, develop customer retention strategies, and increase overall customer satisfaction. By leveraging our expertise, you can ensure your subscription model is optimized to drive growth and improve customer lifetime value.
