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SAAS HEALTH CHECK

Understanding Customer LTV for Your

SaaS Business

What is customer LTV for SaaS businesses?

LTV stands for Customer Lifetime Value
and expresses the amount of money you will
reasonably receive from a customer before he/she
stops working with your company.

Why should you care about SaaS LTV?

Knowing your SaaS LTV gives you the freedom to do

any of the following and reduce lots of

marketing-related worries. You will be able to:

  • 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.

That one simple knowledge can even help you

beat your competitors and avoid some fatal

mistakes. For example, your competitor’s product

price for a year is, let’s say, $1260. And your

competitor is not ready to spend more than $12.6

for acquiring a new customer because his

marketing budget is 10% of the price.

 

But you know from your experience that your

customer is going to stay with you for 2 and more

years, so you are OK with spending $20 and more

to attract him. You will get your investment back in

a long-term period and, well, long-term decisions

are what make your business go ahead.

 

How to calculate SaaS LTV? (formula+example)

You can calculate your SaaS business’s LTV with

several formulas but we are going to introduce the

most common 2 formulas to save you time and

provide maximum results.

CLV Calculation

CLV=ARPA (average revenue per account) / Churn rate

In this case, you understand how much revenue

you generate from a user/unit on average and

divide that number by your churn rate.

 

Your second option is the following formula:

CLV Calculation

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.

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.

How to calculate SaaS LTV? (formula+example)

Customer churn is maybe the saddest momentyou and your team experience because no onewants to lose a customer. Anyway, customers arefree to make new decisions and change theirservice providers. What you have to do is to keep customer churn rate at a reasonable level and lookforward. Here’s how to measure churn rate.

SaaS LTV Calculation

SaaS LTV=The total number of churned customers / the total number of customers

For example, in a year 5 out of 100 customers

cancel their subscription plans offered by your

SaaS company. Your annual churn rate is 5%.

Generally, 5-7% annual churn rate is pretty

much normal for SaaS companies, though you 

have to keep it as low as possible because 

attracting new customers is always harder and 

more expensive than retaining the old ones.

Churn rate calculation can help you understand

your CLV in case you are a SaaS startup, have been

in the market in less than a year or a bit more and

don’t have enough data to calculate CLV.

If you know that in a month you lost 2 out of 40

customers, it means your monthly churn rate is 5%.

When you divide 100% by 5%, the result,

approximately 20 months, is the period your

customers are likely to continue working with you.

And it will help you calculate your CLV in advance,

relying on this predictive data.

Now you have to multiply the average amount of

money you receive from a customer by the

number of months and estimate how much

he/she will contribute to your company after 13

months.

How to extend Customer LTV?

CAC stands for Customer Acquisition Cost and

answers a question – how much is the average

amount of dollars you spend to acquire a single

customer.

 

This is one of the easiest metrics to calculate as it

doesn’t require much data that is hard to get.

Here’s is the formula.

Customer LTV Calculation

Customer LTV=The total amount of marketing and sales expenses / number of customers acquired in a given period

If you spent $12.000 in 2 years and acquired 41 new

customers, then your CAC is about $293. But the

new customer works with your SaaS company for 3

years and his/her CLV is, let’s say $1500.

 

The ratio between CLV and CAC, in this case, is 5:1

($1500 divided by $293). And believe it’s a great

outcome! CLV;CAC ratio should be at least 3,

otherwise, it means that either you spend too

much on marketing or you haven’t designed

effective mechanisms to retain your customers.

How to extend Customer LTV?

How to extend Customer LTV?

Your best approach would be understanding allthe difficulties a customer may face while usingyour software and prepare instructions accordingly.Tutorials or user manuals with screenshots canreally help people stay away from confusion andcontinue working with you. A number of SaaScompanies even offer free online courses on howto use their products.

With encouraging referral programs

People love recommending a product they usedand stayed happy with and also prefer buying aproduct that has been recommended by acolleague, friend or family member.So follow the example of top SaaS companies andoffer motivating referral programs. Because thisattitude brings new customers and retains the oldones without spending huge budgets.

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.

With enthusiastic customer support

You design loyalty programs to encourage yourcustomers to continue using your services and alsoto reward them with benefits and special offers. It’sa win-win situation as your loyal customer feel special and you feel satisfied with your SaaS salesresults.

Incredo is an Armenia-based Inbound

Marketing Agency with a qualified staff,

excellent track record, and ever-evolving

approaches. We help SaaS businesses like yours

stand out in the competitive market and find

their way to success.

 

A perfect doctor identifies his patient’s disease,

prescribes the right medicine and follows the

recovery process until the patient can firmly

stand on his own feet.

 

Hit the orange button below and get your

SaaS company diagnosed with our inbound

marketing methodology!

SCHEDULE A FREE 40-MINUTE CONSULTATION NOW!