Approx. reading : about 5 min
Customer Lifetime Value (CLV) is a key metric that measures business performance for SaaS providers.
CLV measures the total monetary value of a customer over their lifetime as a SaaS solution subscriber. In other words, CLV is a measure of the overall financial contribution of a customer to a business over time. It helps determine the profitability of a customer in the long-term.
CLV is an important metric in the SaaS industry as it allows measuring the long-term profitability of each customer and evaluates the effectiveness of its customer retention strategies. In fact, acquiring new customers is often more expensive than retaining existing ones. Therefore, CLV helps assess the effectiveness of the investments made to retain customers.
It is a key metric for subscription-based business models, which complements the tracking of Monthly Recurring Revenue (MRR).
Calculating CLV can be a complex task as it involves considering multiple variables such as customer retention rate, customer acquisition cost, conversion rate, production or service cost, and the profit margin generated by each customer. There are different methods used to calculate CLV. However, we will focus on a method that is based on profit margin rather than just MRR and purchase frequency:
CLV = (Average profit margin per customer x Average customer lifespan) – Customer acquisition cost
To calculate the average profit margin per customer, you need to consider the revenue generated by each customer, subtract the direct costs associated with the production or service offered, and then divide the result by the total number of customers.
To calculate the average customer lifespan, you need to consider the customer retention rate and the average length of time each customer stays with the company.
→ To determine your profit margin :
Let’s say your SaaS product costs €50/month per user and your customer has subscribed 10 users. Your monthly revenue is €50 x 10 = €500 (MRR).
When it comes to this revenue, you have operating expenses that are necessary for your software program to be used by your customer, including :
If your company spends €300,000 annually on these expenses and you have 120 customers, your operating costs amount to €2,500 per customer or €208 per month per customer.
Your monthly profit margin per customer would then be: €500 – €208 = €292 (58.4%).
→ Relate the profit margin to the customer lifespan and to your customer acquisition cost (CAC) :
If the average lifespan of your customers is 28 months and you need to spend €1,500 (CAC) to acquire each new customer, in this case, your CLV will be the follows:
(€292 x 28) – €1,500 = €6,676, equivalent to 13 months of MRR (compared to €500/month).
It will take thus 13 months before you start having revenue to recuperate the acquisition cost of the acquired customer. It is therefore crucial to avoid CHURN before this period.
By using CLV as a metric, businesses can make more pertinent decisions regarding how to use their marketing budgets and about the customer retention strategies they have to put in place. In fact, using CLV will allow them to target more profitable customers and to offer them special incentives or personalized promotions to encourage their loyalty. Conversely, less profitable customers with lower CLV may receive less attractive offers or may be deprioritized in favor of acquiring more profitable new customers with higher CLV, thus optimizing overall profitability.
CLV is also useful to compare a business’s performance with that of its competitors. Once you have calculated the CLV of a given company, it is then possible to compare it with the CLV of other companies in the same industry, which helps determine whether the company is maximizing customer value in relation to its competitors.
However, CLV should be used in conjunction with other management indicators for a comprehensive evaluation of business performance. CLV does not take into account indirect costs such as customer service expenses, product maintenance costs, or investments in the development of new products or services. Therefore, it is important to use CLV in conjunction with indicators such as customer satisfaction rate, customer referral rate, or customer acquisition cost to have a holistic view of business performance.
In conclusion, CLV is a key metric that should not be used in isolation. On the contrary, it is crucial to use it in conjunction with revenue indicators such as MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), and ARPA (Average Revenue Per Account). It is also important to compare this metric with customer acquisition cost (CAC) and CHURN rate to determine whether an acquisition campaign is likely to be profitable or not.
By considering these additional metrics, businesses can make more pertinent decisions about their marketing and customer retention strategies.
Increasing Customer Lifetime Value (CLV) should be one of the main objectives of any Software as a Service (SaaS) company. The higher the CLV, the more long-term profitability the business can expect. Here are some strategies to increase CLV in the SaaS industry :
Providing a positive user experience is essential for long-term customer retention and, consequently, increasing your CLV. It is important for the company to offer a user-friendly and intuitive product, and to ensure that its customer service is responsive and capable of resolving any issues encountered.
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By adding extra features, your company is more likely to retain your customers in the long run. With new features, your customers will be able to do more with the product, which will encourage them to use it more frequently and for a longer period.
Additionally, consider introducing new subscription plans. By offering premium packages, you can encourage customers to upgrade to a higher subscription level and increase their CLV.
In addition to offering a premium package, why not adding a “personalized” option? By choosing this type of offer, your customers can personalize the options based on their habits, needs, and preferences.
User communities can help increase customer retention by creating a sense of belonging to the brand. Customers who feel part of a community are more likely to stay committed to your product and pay more in the long run.
By offering incentives for customers to renew their subscriptions early, you can encourage them to extend their subscription before the latter expires. Analyze customer behavior throughout their engagement period and, as their subscription nears its ends, propose an offer that corresponds even more to their needs and preferences.
In summary, to increase CLV in the SaaS industry, it is important to focus on reducing CHURN rate and increasing customer satisfaction and engagement. This can be achieved through strategies such as introducing additional features, improving product usability, providing high quality customer support, creating a user community, offering early renewal incentives, and providing a personalized experience. These efforts will not only boost CLV but will also ensure the profitability of your business in the long-term.
Dotsha is a monetization and management solution specifically designed for SaaS providers. It includes a user-friendly dashboard that automatically calculates numerous key metrics based on your billing data.
With Dotsha, you have access to up-to-date data that accurately reflects your billing reality, including metrics such as MRR, ARR ARPU, CHURN rate and others. This will allow you to effectively analyze your acquisition data and compare it with your CLV.
The customizable dashboard can be shared with all the members of your organization, facilitating decision making based on reliable and up-to-date data.
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MRR : Monthly Recurring Revenue (MRR), is a metric used to measure the monthly revenue generated by a SaaS company from its recurring subscriptions.
The formulas to calculate MRR is usually as follows:
MRR = Sum of monthly recurring revenues
ARR : Annual Recurring Revenue (ARR) is similar to MRR but calculated on an annual basis instead of a monthly basis. To calculate ARR, you need to multiply the MRR by 12.
The formula to calculate ARR is as follows
ARR = MRR x 12
NRR : Net Revenue Retention (NRR) is an essential metric used to determine the value of recurring revenues retained by a company after having taken into account customer CHURN and discounts over a given period.
The formula to calculate NRR is generally as follows:
NRR = (Current Monthly Revenues from existing customers – Churn – Discounts) / Previous Monthly Revenues from existing customers) x 100
CAC : Customer Acquisition Cost (CAC) is a metric that determines the total cost incurred by a company to acquire a new customer.
The formula to calculate CAC is generally as follows:
CAC = Total Marketing and Sales expenses/ Number of New Customers Acquired during the period
CHURN : Churn rate or rate of attrition is a metric used to determine the percentage of customers who have stopped using the service provided by a SaaS company within a given period of time.
The method to calculate CHURN is usually as follows;
CHURN = Number of customers lost during a period of time/Total number of customers at the end of that period.
Approx. reading : about 8 min
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