SaaS CLV: How To Boost and Calculate It

True love lasts a lifetime, right?
The best customer relationships do too!

Customer lifetime value (CLV) is a metric that can help you estimate the revenue each customer can generate for your SaaS business across the entire business relationship. 

You can leverage this information to increase customer loyalty, reduce customer churn rate, and make strategic marketing decisions.

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What Is SaaS Customer Lifetime Value?

Customer lifetime value is the total revenue a SaaS business expects to make from each customer throughout its relationship with them. 

A high CLV shows that you’re delivering a great customer experience and they’re happy with your products and services. 

In simpler terms:
They’re willing to shop more and stay longer with you. 

Meanwhile, a declining CLV means your customers aren’t satisfied with your products and churn pretty quickly.

What Type of Companies Can Measure SaaS CLV? 

CLV can be used by any company, regardless of its size or industry. 

However, given the nature of the metric, it’s more suited to subscription-based companies that require repeated renewals vs companies that operate on a one-time payment model.

With a one-time payment model, your CLV is essentially the upfront price paid by the customer and that’s about it. There’s not a whole lot of additional information you glean from that data!

Still wondering why you should track your company’s SaaS CLV?
Let’s check out a few ways it can help improve your business.

Why Is It Important to Measure SaaS CLV?

Here are three reasons why SaaS CLV is important for your business:

  • Gives you an overview of the company’s financial health: Use your CLV to estimate future revenue and cash flow, helping you make good business decisions in the future.
  • Helps you maintain the ideal customer acquisition costs ratio: Keeps you on track for the right CLV:CAC ratio for good business health, which is 3:1. If your acquisition costs are higher than the lifetime value, you’ll be losing money. 
  • Leads to more efficient marketing: Helps you identify what type of customers bring in the most value. You can then tailor your marketing strategies to attract this specific demographic of valuable customers.  

So how do you calculate CLV?

How to Measure SaaS CLV?

Customer lifetime value is the value a customer generates multiplied by the average customer lifespan. 

CLV = Customer value x Average customer lifetime

To measure CLV:

  • First, calculate the average purchase value (how much they spend on a purchase) and average purchase frequency rate (how many times they make a purchase over a timespan).
  • Multiply both those values to get the average customer value.
  • Calculate the average customer lifetime value by multiplying your average customer value by the average number of years customers stick around for.

Let’s break each of those numbers down:

  • Average Purchase Value: The average money a single customer spends on your product or service over a period (typically a year).
APV = Company’s total revenue / Number of purchases made in the same time period
  • Average purchase frequency rate: The average number of times a single customer makes a purchase over a given period (typically a year).
APFR = The total number of purchases over a period / The number of unique customers who purchased from you
  • Average Customer Lifetime: The average time they stick around before leaving your business. It’s the average number of days between the customers’ first order date and the last order date.    
ACL = The sum of customer lifespan / Number of customers

Now that we’ve got that out the way, let’s go over a few CLV benchmarks you should aim for.

What CLV Benchmark Should SaaS Companies Aim For?

While there’s no specific figure to aim for, a SaaS company should ensure its customer lifetime value is at least 3 times their customer acquisition cost.

For example, if you spend $30 to acquire new subscribers, your customer lifetime value should be at least $90 to achieve the ideal CLV: CAC ratio for good business health.

How do you ensure this?
Let’s say your customers generally subscribe for 1 year. 

You should constantly try to increase this subscription time because the longer customers stay with you, the higher the recurring revenue generation will be.

To do so, you can offer discounts for early subscription renewal. 

This ensures you don’t have to spend more to acquire a new customer (lower acquisition costs) and existing customers stay with you longer — increasing your CLV.

So what are the other ways to use SaaS CLV?
Let’s find out.

2 Ways You Can Use SaaS CLV in Your Business

In addition to indicating business health, you can use your CLV to help you with:

1. Segment Prioritization 

When you calculate your CLV, you can identify the kinds of customers that bring in the most value. Maybe they’re the leads who came in through in-person sales, or maybe they’re customers from a certain industry.

Eitherway, as these segments are bringing in the most value, they should be ones you prioritize the most. Tweak your marketing and sales activities to appeal to that demographic to make your entire sales funnel more profitable and efficient.

2. Product Development

Using SaaS CLV, you can identify what features and services are most valuable to customers and build a product they’ll actually use!

For example, if the SaaS CLV of customers using a particular plan or feature is high, you can spend more time and resources developing those features and products. You can also take their feedback to develop your product to meet their needs. 

Next, let’s check out a few tips to boost your SaaS CLV score.

6 Effortless Ways to Increase SaaS CLV

Follow these tips for higher SaaS CLV rates:

1. Upgrade Your Onboarding Process

Did you know nearly 23% of customer churn is due to poor onboarding?
Some actionable tips to fix this issue and deliver a great customer experience are:

  • Keep your product interface user-friendly, fast, and easy.
  • Use interactive videos, guided product walkthroughs, and more to teach customers how your product is used.
  • Providing live support when possible.

2. Promote Up-sells and Cross-sells 

Upselling refers to trying to get an existing customer to purchase extra features or extensions. For example, a food delivery platform may run a campaign to get its users to purchase a premium food delivery plan. 

Meanwhile, cross-selling means selling new offerings in addition to the main product to an existing customer. A food delivery platform, for instance, may try to get existing customers to subscribe to a grocery delivery service they’ve introduced. 

So how do upselling and cross-selling increase your customer LTV?
When you upsell or cross-sell, you add value by enhancing an existing customer relationship. It’s also cheaper and more effective to sell to an existing customer than look for a new one.

3. Invest in Product Education

Customers may often leave because they don’t know how to use your product properly or fail to see its value. 

The best way to counteract this is to launch product tutorials, how-to guides, training classes, and more. This will help them see how your product can help them and compels them to hang in longer — increasing lifetime value.

4. Boost Customer Retention

Customer retention rate is the percentage of customers who remain customers after a specific time period. 

Here’s the thing:
The higher the retention rate, the longer your customers will stick with you. 
And this is what will drive steady cash flow to your SaaS business. 

Some ways you can increase the customer retention rate are:

  • Spend more time developing your product to meet your customers’ changing needs and increase customer satisfaction.
  • Build a strong customer support team to give your customers the attention they deserve.
  • Give special discounts and early access to new features or products to reward a loyal customer for staying with you.

5. Offer Omnichannel Customer Support

A SaaS company should strive to provide customer support through all possible channels like:

  • Chatbots
  • Email
  • Phone
  • Social media

By providing continual assistance via their preferred channels, you make their product experience as convenient as possible. This, in turn, increases their likelihood of sticking around. 

6. Collect Customer Feedback 

Since customers have first-hand knowledge of using your product, it’s a good idea to ask them how you can improve the customer experience. 

You can use this customer feedback to add new product features, remove unnecessary ones, and improve your customer onboarding experience and marketing strategies.

But to build powerful business strategies and develop a good customer lifetime value score, you’ll also need to look at other essential metrics. 

Let’s check them out.

4 SaaS CLV-Related Metrics

Here are some other metrics related to customer lifetime value:

  • Churn Rate: It refers to the number of customers who leave your SaaS company over a specific time period. A low churn rate means your customers stay with you longer, which increases your lifetime value. 
  • Average Revenue Per User: The average revenue per user (ARPU) is the revenue generated by a user for a specific time period.
  • Customer Acquisition Cost: The customer acquisition cost (CAC) helps you decide how much you spend on acquiring a customer. Ideally, the CLV:CAC ratio should be 3:1.
  • Account Expansion and Contraction: Account expansion refers to the additional revenue generated from an existing customer, while contraction is the loss of revenue from an existing customer. 

3 SaaS CLV Related FAQs

Three SaaS CLV FAQs are:

1. How Often Should You Measure SaaS CLV?

The frequency at which you should measure SaaS CLV depends on several factors, such as:

  • Size of your business: The larger your customer base, the more frequently you can measure it.
  • Customer base stability: The less stable your customers are, the more frequently you should keep an eye on your CLV.
  • Frequency of your customer interactions: The more interactions you have with your customers, the more frequently you should calculate CLV.

2. What Is the Difference Between CLV and LTV?

There is no difference between CLV and LTV. 
Both terms look into the lifetime value of a single customer. 

3. What’s a Common Mistake When Calculating CLV?

Customer segmentation helps you study different types of customers and how they contribute to your revenue.

CLV calculations without any customer segmentations aren’t very useful.

If you don’t segment your customers, you won’t know which customer segment contributes the most to your business. This can make it harder to build business strategies that may help attract customers that bring in the most value.

Leverage CLV To Build A Long-Standing Customer Relationship

Use the information we highlighted to reduce your customer churn rate, gain insight into customer success, and create marketing strategies to attract the right customers.

Remember, the longer a customer stays with you, the easier it is to remain profitable!

About the author

Startup Voyager is a content and SEO agency helping startups in North America and Europe acquire customers with organic traffic. Our founders have appeared in top publications like Entrepreneur, Fast Company, Inc, Huffpost, Lifehacker, etc.