How to Calculate and Increase Your Customer Lifetime Value
Excelling in the SaaS industry means retaining customers and reducing your customer churn. In order to accomplish that, there are plenty of statistics and metrics you need to track and churn-fighting strategies you can implement.
But one of the most important areas to focus on is your customer lifetime value. By calculating, understanding, and increasing your customer lifetime value, you can help your SaaS business not only acquire but retain highly valuable customers, which will strengthen your business’ bottom line and overall health long-term.
Let’s take a deep dive into customer lifetime value: what it is, why it matters, how to calculate it, and strategies you can use to increase it.
What is customer lifetime value?
In simple terms, your customer lifetime value is the metric that represents the total net profit or dollar amount that you can expect to generate from one individual customer throughout their entire lifecycle within your company — from sign-up to cancellation. Customer lifetime value (or LTV) is an important metric for SaaS companies to track and understand.
Why does customer lifetime value matter?
Knowing your customer lifetime value can make a huge difference in a SaaS business. Not only does your customer lifetime value help you get a feel for the happiness of your customers and the overall health of your product, but it can also help you predict future profit and revenue.
It can help lower costs
You probably already know that it’s significantly more expensive to acquire a new customer than it is to retain an existing one. And customer LTV is huge when it comes to lowering customer acquisition costs. If you can reduce churn and increase your the lifetime value of your current customers, you can drive company growth without pouring a bunch of money into finding new customers.
It can help identify your ideal customer
If a customer is has a high lifetime value, then there’s obviously a reason for that. Why is that customer staying with your product for so long? Are they subscribing to the highest possible tier? What drives them to make these purchasing decisions? By identifying and segmenting your customers with the highest customer lifetime value, you can pinpoint their commonalities (a common need, a specific location, a particular income bracket, etc.) and target the specific characteristics of your ideal customer.
It can help you proactively reduce churn
A big part of churn reduction is being able to spot and stop churn before it ever happens. When you identify signs of potential churn, you have the opportunity to retain customers before they ever hit the cancel button and stop future churn before it has the chance to affect your bottom line. If you notice your customer lifetime value dropping, you have a good indicator that something is happening with the health of your customer base.
It can help you increase revenue
In this particular case, the importance of customer lifetime value is probably immediately obvious. The longer a customer subscribes to your product, the higher their lifetime value. The higher their lifetime value, the more revenue your company nets per customer. Therefore, by tracking and increasing your customer lifetime value, you increase your overall revenue.
When you calculate your customer lifetime value and identify the customers whose LTV is the highest, you have the opportunity to upsell those customers and even tailor your products or marketing specifically to your highest spenders.
How do you calculate your customer lifetime value?
In order to calculate your customer lifetime value, you’ll need to measure how much your customers generate in revenue minus their overall revenue churn.
Customer LTV Equation: Average revenue per user (ARPU) / MRR churn (or customer churn)
While there are many other important SaaS metrics that you can look at in conjunction with customer lifetime value, there’s one major analytic that you need to know in order to truly analyze your customer LTV: customer acquisition cost (CAC). As we mentioned earlier, acquisition and customer lifetime value go hand in hand. So it’s important to know what your CAC is when you’re calculating and understanding your customer LTV.
Customer acquisition cost calculation
Your CAC is the amount you’re paying to get new customers. If the amount you’re paying to get new customers (CAC) is higher than how much your customers are worth (LTV), then that’s bad news for your company. Use the formula below to find your CAC.
CAC Equation: (Total cost of sales + Marketing) / number of customers acquired
How do you increase your customer lifetime value?
Once you’ve calculated your customer LTV and your CAC, you can compare them to see whether your marketing efforts are truly paying off. If the data doesn’t reveal what you want, then it’s time to start implementing some strategies to increase your customer lifetime value.
Focus on upsells
One of the easiest ways to increase LTV is to cultivate upsells and cross-sells. Research has shown that you’re 60-70% more likely to sell to a current customer when compared to new customers. Try to enhance your email marketing and outreach to increase upsells. You can target strong current customers and let them know about the additional benefits they might enjoy from a higher tier of service.
Enhance your offerings
Your product(s) and company should always be evolving. If you let your product stall out, then your customer LTV is sure to follow. That’s why increase your customer lifetime value relies, at least in part, on improving your current product and/or developing new ones. Try to create new experiences that entrench your presence in customer workflows and improve the value of your product ecosystem.
Another great way to enhance your current and future products is by making them “stickier”. This essentially means that you want to make it less appealing for a customer to leave your product. For instance, you could offer them a custom dashboard where they can integrate their data or provide cloud-based storage. Features like this help embed your product more firmly in the customer’s life, making it much easier and more appealing for them to stay than it would be for them to leave or move to a competitor’s product.
Identify the most valuable parts of your customer’s lifecycle
Every SaaS customer has a lifecycle that follows the same basic steps. If you want to increase your overall customer lifetime value, then it’s important to identify the stages of the customer lifecycle where users realize the most value from your SaaS product and which stages are the biggest culprits of churn.
For instance, let’s say that you examine the customer lifecycle and notice a big drop in numbers during the customer qualification stage. This could offer a clear indicator that your customers didn’t see enough up-front value in your product to make it to the purchase stage. If that’s the case, it may be time to reassess your educational materials and your free trial offer.
Use personalized, targeted discounts
Offering a discount may seem counterintuitive when it comes to increasing the total revenue you receive from a customer. But research has actually shown that offering a medium-sized discount can increase the average future value of a customer by 20% to 25%. The key word here is “medium-sized”. There’s rarely (if ever) a good reason to offer a very high discount. But offering a moderate discount (anywhere between 5-20%) can actually help increase and extend your customer LTV.
The other key to discounts is this: when it comes to increasing your customer lifetime value, the goal of discounts should ultimately be to get more customers to spend more on your product…not less. You can accomplish this by tying your free trial offers to a specific pricing tier. Let’s say you have a new customer who starts your 30-day free trial, selecting your $25/month plan as the one they’ll begin after completing their free trial.
When it gets close to the end of their trial period, try offering them the next tier up (say $75/month) at a discounted price (say $50/month). You could choose to offer that discount for a limited time or even offer it forever, until they downgrade, upgrade, or cancel (and that discounted price is a good incentive not to cancel).
Either way, you’re taking a customer who was only planning to pay you $25/month and moving them up to $50/month, automatically increasing their LTV. That’s the power of offering a targeted discount at the right moment.
Are you ready to increase your customer lifetime value?
With Churnkey, reducing your churn and increasing your customer lifetime value is easier than ever. We’ll help you supercharge all aspects of customer retention and optimize your company’s growth. Our customers reduce cancellations by up to 58% and increase customer lifetime value by 26%.
If you’re ready to take action, reduce churn, and increase customer LTV, get started with Churnkey today.
