SaaS LTV (Customer Lifetime Value) Guide: Running a Health Check on Your SaaS Business
What is customer LTV for SaaS businesses?
Why should you care about SaaS LTV?
- Discover which customer segment brings most revenue to you as LTV is calculated per customer. Maybe customers with low-profit margins who pay less stay longer and generate more revenue, while those with high-profit margins are only a few, stay shorter and are not lucrative to acquire. And in this case, they are not lucrative because you spend a large amount for acquiring them, don’t even get your investment back because they stick around too short
- Determine how much budget to allocate for acquiring a new customer
- Know how much ROI to expect from a newly acquired customer
- Understand how much discount you can afford to do.
How to calculate SaaS LTV? (formula+example)
LTV = ARPA (average revenue per account) / Churn rate
Your second option is the following formula: CLV=average annual customer revenue*average duration of customer retention in years.
This time you calculate what’s the average amount you receive from all of your customers annually and multiply that amount by the number of years they stayed with you. As you can see, in order to make use of this formula, you should have annual subscribers to be able to calculate another SaaS metric like ARPA.
Remember that months or even a year are not the best period of time to consider because the more years, the more data and consequently the more accuracy. That’s why it’s difficult for young companies to calculate their CLV and usually, they have to rely on predictive, not real historical data.
Without any big efforts, you can input your data into a tool and know your SaaS LTV with an LTV calculator. And your customer lifetime value calculation becomes even easier.
How are SaaS Customer Lifetime Value and churn rate interrelated?
The total number of churned customers/the total number of customers.
LTV: CAC Ratio
The total amount of marketing and sales expenses/number of customers acquired in a given period.
How to extend Customer LTV?
With a successful onboarding process
Your best approach would be understanding all the difficulties a customer may face while using your software and prepare instructions accordingly.
Tutorials, user manuals, and guides with screenshots can really help people stay away from confusion and continue working with you. A number of SaaS companies even offer free online courses on how to use their products.
For example, Marketo, marketing automation software, has established Marketo University. There you can find free online training on how to use Marketo for email marketing. This process requires an introducer, video operator and editor, scriptwriter and time.
For example, Marketo, marketing automation software, has established Marketo University. You make investments but don’t forget that free education is a form of inbound marketing and free content (especially videos) attracts a larger number of users.
With encouraging referral programs
People love recommending a product they used and stayed happy with and also prefer buying a product that has been recommended by a colleague, friend or family member.
So follow the example of top SaaS companies and offer motivating referral programs. Because this attitude brings new customers and retains the old ones without spending huge budgets.
For example, Hubstaff, time tracking and project management software for teams, provides a 10% discount for every paying user you bring to the company. If you refer Hubstaff to 10 colleagues in a month, you get a 100% discount.
With enthusiastic customer support
It’s important like never before. If years ago phone calls were the main means of communication and a source of information, now we have social networking sites, email services, and contact forms.
Get back to your customers as soon as possible, provide accurate and comprehensive answers and don’t forget they are unique. Inspire them to think positively about your attitude so they tell others that you are exceptional.
For example, when you send an email to a popular SaaS company’s inbox, you usually receive an automated email that tries to help you before their support team will start dealing with your question or problem.
The email looks something like this:
“We have an FAQ section where you might find the answer to your question – here’s the link. In case your request is related to our Live Demo – get access here. You can view the status of your ticket here.”
You simply need to gather all your useful resources and links in one automated email so people find quick answers without waiting for days.
But don’t think that human interaction is not important anymore – on the contrary. Maybe a user doesn’t find his/her answer in your email, so try to clean your email inbox as soon as possible.
With special loyalty programs
You design loyalty programs to encourage your customers to continue using your services and also to reward them with benefits and special offers. It’s a win-win situation as your loyal customers feel special and you feel satisfied with your SaaS retention results.
Did you know there is customer loyalty management software called Open Loyalty? That tool allows you to manage your customers based on their purchase history and anniversaries, give points for specific interactions (registration, social activities), reward with promotion after a certain action.
Which rewarding approach suits you best depends on what type of software you offer. If it’s an online streaming platform, then rewarding with points will work great. If your software is more “serious”, you can consider promotions.
With an annual billing system
You know that monthly and annual billings are the most popular billing systems among SaaS companies, though sometimes you can come up with multi-year plans too.
When you put your emphasis on the annual plan and attract long-term customers, you make a concession such as a 15-20% discount or 1 more month of a free trial. Because a customer agrees to stay around a year and solves a retention problem for you. Mainly annual plan subscribers are those who contribute to your LTV as their commitment excludes the case of their churn.
And if you think that you lose 15-20% because of a discount consider that a customer churns after 2-3 months and you are forced to acquire a new one. Customer acquisition cost will almost always be higher than the 15-20% annual discount you offer.