18 Apr What is a SaaS Customer Lifetime Value (LTV) and How You Calculate It
Startups face a lot of problems in their daily operations, but perhaps the most notorious one that leads to their eventual collapse is that they retain far fewer customers than they gain new ones.
Or more technically put, their customer retention rate is lower than their customer churn rate. You are probably wondering what the retention rate and churn rate are. Well, read on and find out.
What is Customer Lifetime Value (CLV)?
In marketing, you will find several ways of referring to Customer Lifetime Value. It is CLTV, LTV, LCV, or CLV in short, and it is called the lifetime value or the lifetime customer value. For the purpose of simplicity, we will call it Customer Lifetime Value (CLV). It is a forecast of net profits ascribed to a customer throughout the relationship with the client.
Churn rate is the rate at which your business loses clients. The customer retention rate is the percentage of clients you can keep year after year. In effect, the greater your retention rate and the lower your churn rate, the better off your firm will be. They help to increase the lifetime value of your customers.
The yearly subscription is the source of revenue for any SaaS company. As a result, the cost of acquisition of a customer (CAC) should always be less than your Customer Lifetime Value (CLV).
How to calculate your Customer Lifetime Value
The calculations can be done using the following equations:
CLV = [0.5 * 1 / churn * (2 * ARPA + ARPA_growth + 2* ARPA *(1 / churn – 1))] * margin
ARPA (Average Revenue per Account)
CLV plays a key role in driving the business forward. However, the real test does not lie in gaining new customers, but in making the existing customers stay. To maximize the CLV, you need to identify and fix the things that compel your customers to leave.
In conclusion, maximizing the CLV is crucial for your business, especially in the SaaS setup where clients can terminate their contracts at any moment they choose to. Every startup should focus on improving its retention rate. This way they will automatically improve their CLV as well.