Customer Lifetime Value (CLV)

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV or CLTV) is a metric used in marketing and customer analytics to estimate the total net profit a business can expect to generate from a customer over the duration of its relationship with the business. 

Why is Customer Lifetime Value Important?

CLV is an important metric for SaaS businesses because it helps to make more informed decisions about customer acquisition, retention, and marketing strategies. By understanding a customer's value over time, businesses can allocate resources more effectively. They can target high-value customers and optimize their marketing efforts to drive maximum returns.

Here are three reasons CLV or Customer Lifetime Value is important in SaaS.

Subscription-based Revenue Model

Typically, SaaS businesses operate on a subscription-based model where customers pay a recurring fee for access to the software. CLV helps SaaS companies understand their customer’s long-term value, allowing them to make better-informed decisions about customer acquisition, pricing, and retention. By focusing on increasing CLV, SaaS businesses can boost their recurring revenue and improve overall profitability.

Customer Acquisition Cost (CAC) Recovery

The cost of acquiring new customers in SaaS is expensive. It involves major marketing, sales, and onboarding efforts. CLV helps SaaS businesses determine the period to recover the customer acquisition cost and achieve profits for each customer. A higher CLV indicates a faster CAC recovery, crucial for a SaaS business’s financial health and sustainability. 

Customer Retention and Reduction in Churn

Retaining customers and reducing churn is critical to maintain and growing revenue in the SaaS space. CLV can help SaaS businesses identify high-value customers, the ones more likely to remain loyal and contribute to the business in long-term revenue. Thus, by understanding the factors contributing to higher CLV, SaaS companies can design targeted retention strategies, like tailored product offerings, personalized customer support, or loyalty programs. 

How to Calculate Customer Lifetime Value?

To calculate CLV, businesses must estimate the average revenue per customer, the average customer lifespan, and the costs of acquiring and serving customers. The customer lifetime value or CLV formula is:

CLV = (Average Revenue per Customer x Average Customer Lifespan) - Total Costs of Acquiring and Serving the Customer

However, calculating CLV with more advanced models considers customer segmentation, discount rates, and customer churn rates to provide a more accurate CLV prediction.

What is a Good Customer Lifetime Value Score in SaaS?

In SaaS, there is no universally accepted "good" Customer Lifetime Value (CLV) score as the factors like company size, target market, and business model vary by company. 

However, the benchmark CLV to CAC ratio in SaaS is 3:1. If your CLV falls between 3-5 times your CAC, it is a good range. For instance, if you spend an average of $120 to acquire a customer, aim for a CLV of a minimum of $360.