What Is SaaS CLV? (+ How To Boost and Calculate It)

Customer lifetime value (CLV) is an essential metric that can help you determine the potential revenue a customer can generate for your SaaS business over a certain period.

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

In this article, we’ll highlight what SaaS CLV is and how it’s calculated. We’ll also give you tips to boost your CLV rates and cover a few CLV-related metrics and FAQs.

Let’s get started.

What Is SaaS Customer Lifetime Value?

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

In other words, it’s the amount of money a customer is willing to spend on your business while associating with your product or service.

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

But that’s not all.

Here are some more benefits of customer lifetime value:

Gives an overview of the company’s financial health: Estimates future revenue and investments, helping you make good business decisions in the future.

Helps 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 identify what type of customers bring in more value. You can tailor your marketing strategies to attract and retain these valuable customers.

So how do you calculate CLV?

How to Calculate SaaS CLV?

First, let’s look at a few important metrics you’ll need to measure CLV:

Average Purchase Value: Shows the average total revenue a single customer spends on your product or service.

APV = Company’s total revenue / Number of purchases made in the same time period

Average purchase frequency rate: Calculates the average number of times a single customer purchases from you in a given period.

APFR = The total number of purchases / The number of customers who purchased from you

Average Customer Lifetime: Refers to the average time they will remain active 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

Customer Acquisition Cost: Shows how much you spend to acquire one customer.

CAC = The total sales and marketing expenses / The number of new customers

2 Ways to Calculate the Customer Lifetime Value

There’s one commonly used formula to calculate CLV:

CLV = Customer value x Average customer lifetime

However, there are two data collection methods you can use to populate that formula:

1. Historic CLV Calculation

This formula uses historical data to determine customer value. However, it doesn’t take existing customers into account. And as not every customer journey can be considered identical, historical CLV analysis is mostly used for short-term user interactions.

That’s because user behavior tends to be stable for only shorter time periods.

For example, active users may stop interacting with you and become inactive. Meanwhile, inactive users may start to buy from you and become active.

And so, it’s best to use historical analysis only if you want to measure CLV for a short duration.

2. Predictive CLV Calculation

The predictive method uses machine learning and regression to predict the buying behavior of existing and future customers.

Before you perform a predictive CLV calculation, you need to do the following:

Identify the touchpoints (buying your product, sharing your business’s ad, etc.) where users generate value.
Find out the factors that determine customer value and how they differ from one customer segment to another.
Figure out why a user moved from one touchpoint to the other.

Now, to measure CLV:

Calculate the average purchase value and purchase frequency rate
Multiply the customer’s average purchase value by their average purchase frequency rate to get a customer value.
Calculate the average customer lifetime value by taking the average of years that an individual customer uses your SaaS business.

But simply calculating the CLV isn’t enough.

Let’s find out 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 greater than the customer acquisition cost.

For example, if you spend $30 to acquire new subscribers, your customer lifetime value should be at least $90 (3 times greater than CAC) to get the ideal CLV: CAC ratio for good business health.

How do you ensure this?
Suppose your consumers generally pay for 24 months of subscription to your mobile app. 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 new features or discounts for early subscription renewal. This ensures you don’t have to spend more to acquire a new customer, and existing customers stay with you longer — increasing your CLV.

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?
It even surpasses customer service as the top factor affecting your churn rate.

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.

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 customer.

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 people who use your product for a specific time period without churning.

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 all 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.

5 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. An individual’s average revenue and gross margin give us the average profit per user.

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.

Net Promoter Score: The net promoter score measures how loyal your customer base is to your brand.

Next, let’s check out some commonly asked questions related to CLV.

2 SaaS CLV Related FAQs

Here are two commonly asked CLV questions and their answers:

1. 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.

2. What are some Common Mistakes When Calculating CLV?

Some things you can avoid while calculating the customer lifetime value are:

1. Not Segmenting Your Customers

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

Some customers, for instance, may make frequent, small purchases, while others may make large but occasional purchases over time.

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 these high value customers.

2. Using the Wrong Inputs

When measuring customer LTV, ideally calculate the revenue projection and not the revenue to date.

A revenue projection includes revenue forecasts that you can adjust according to known future variables, like potential repeat purchases, business referrals, and more.
Revenue to date refers to the profits from your existing customers.

You should also avoid using unrealistic projection timelines — meaning your timelines shouldn’t be too short or long.

For example, it may be difficult to forecast variables if you take a timeline of 10 – 20 years. And if your projection is too short, you won’t be able to grow at the right speed for your business.

3. Not Aligning CLV with Your Goals

Sometimes, there may be a misalignment between your customer LTV score and company goals. In such cases, you won’t be able to implement CLV properly even if you accurately calculate it.

For example, if your goal is hitting a certain revenue target, you may focus solely on acquiring a new customer rather than retaining existing ones. You may spend a lot of money on marketing and advertising to attract new subscribers without considering the long-term value of each customer.

In contrast, if you focus on retaining existing customers by providing excellent customer service, incentives, and other perks that boost customer loyalty, you’re more likely to increase your CLV.

This can result in better growth in the long run, as a loyal customer is more likely to make repeat purchases over time.

Leverage CLV To Build A Long-Standing Customer Relationship

Use the information in this guide to reduce customer churn rate, gain insight into customer success, identify high value customers, and create marketing strategies to attract the right customers.

And if you need help capturing and retaining high value customers, contact a Startup Voyager specialist to create a marketing strategy backed by powerful, converting content.

With top-notch content and the right SEO strategy from Startup Voyager, you can easily attract more high value prospects to boost your SaaS CLV rates.